Functions of prices

Question 1

4 Functions

Answer 1

1. Signalling Function
2. Incentive Function
3. Rationing Function
4. Allocative Function

Question 2

Signalling Function

Answer 2

• Prices provide info that allows buyers and sellers in a market to plan economic activities.
• Prices charged provide vital information about what to buy.

Question 3

Incentive Function

Answer 3

• Prices create incentives for people.

- Higher prices in a market create incentives for producers to provide more. (Larger profits)

Question 4

Rationing Function

Answer 4

• Prices ration demand for a product

Question 5

Allocative Function

Answer 5

• Changing prices allocate scarce resources to the markets in which there is excess demand

Question 6

Market Failure

Answer 6

• When market mechanism leads to a misallocation of resources.