functions of price mechanism

Question 1

signalling function

Answer 1

market prices will adjust to demonstrate where resources are required, and where they are not.

increase price = shortages
decrease price = surplus

Question 2

incentive function

Answer 2

since firms want to make higher profits, resources move out of other industries into the more profitable one

Question 3

rationing function

Answer 3

ration out goods according to consumer’s willingness and ability to pay. cannot pay? don’t buy lor = drop out of the market

Question 4

product market

Answer 4

1. what (and how much) to produce (EGYPT)
2. for whom to produce (ability to pay principle)

Question 5

factor market

Answer 5

2. how to produce (how change in factors of production will cause firms to find the most efficient and least cost of combi of factors of production - which method is more preferred instead?)