1.2.7 Price Mechanism Flashcards

1
Q

What does Adam Smith call the price mechanism?

A

The mystery of the invisible hand.

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2
Q

What markets does the price mechanism work in?

A

All of them, local, nation and global.

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3
Q

What are the 3 functions of the price mechanism?

A

Rationing, Signalling and Incentive.

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4
Q

What is rationing?

A

When scarce resources become scarcer the price will rise further. So if there is a surplus, prices fall so consumers can afford them.

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5
Q

What is signalling?

A

Where prices provide information to producers and consumers where resources are required and where not

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6
Q

What is incentivising?

A

Where prices for a good/service rise so producers are incentivised to reallocate resources to a more profitable market to maximise profits

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7
Q

What is the price mechanism?

A

The interaction between supply and demand in a free market.

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