1.2.7 Price Mechanism ✅

Question 1

What is price mechanism?

Answer 1

Interaction of supply and demand in the free market which both determine price.

Question 2

What is rationing?

Answer 2

Price system rations goods to those who can afford or value it highest.
Price increase = some people can’t afford to buy (others may lose desire to buy).
Price decrease = more able to afford.

Question 3

Name all three functions in allocating resources?

Answer 3

Rationing, signalling, incentive

Question 4

what is the signalling function?

Answer 4

The change in price acts as a signal where resources should be. Change in price indicates to consumers and suppliers that the market conditions have changed so they should adapt buy changing amount supplied or bought. (Price equilibrium moves the output equilibrium moves w it).

Question 5

What is the incentive function?

Answer 5

Actions that follow.
Price rise = suppliers realise that should produce more to make more money.
Prices lower = consumers incetiviesed to buy more.

Question 6

What do market forces do?

Answer 6

Help bring the equilibrium price.

Question 7

What did Adam smith refer to these functions as?

Answer 7

“Mystery of the invisible hand”