1.2.7 Price Mechanism Flashcards
What does Adam Smith call the price mechanism?
The mystery of the invisible hand.
What markets does the price mechanism work in?
All of them, local, nation and global.
What are the 3 functions of the price mechanism?
Rationing, Signalling and Incentive.
What is rationing?
When scarce resources become scarcer the price will rise further. So if there is a surplus, prices fall so consumers can afford them.
What is signalling?
Where prices provide information to producers and consumers where resources are required and where not
What is incentivising?
Where prices for a good/service rise so producers are incentivised to reallocate resources to a more profitable market to maximise profits
What is the price mechanism?
The interaction between supply and demand in a free market.
