1.2.7 Price Mechanism Flashcards
1
Q
Price mechanism
A
The interaction of the forces of supply (firms) & demand (consumer) results in a price at which suppliers will supply & consumers will buy it- it helps ration & allocate resources
2
Q
Types of price mechanism
A
- SIgnal
- incentive
- rationing
3
Q
Signalling
A
Providing information to firms as to what to produce
- e.g if the price of a good rises, this signals to firms to make more of it
4
Q
Incentive
A
The profit motive- firms will make more of something if they can profit from it
5
Q
Rationing
A
Consumers can only buy something if they can pay the money required
- e.g firms changing the price relative to the supply & demand in order to eliminate surpluses and shortgages
6
Q
How can the price mechanism eliminate surpluses?
A
- At excess supply, this signals to firms that price is too high
- So they’ll lower the price to eliminate excess supply meaning the surplus will clear & equilibrium will form at a lower price
7
Q
Factors of production
A
Land, labour, capital, entrepreneurship
