LS16 - Price Mechanism Flashcards
(6 cards)
1
Q
Price Mechanism
A
The way demand and supply interact with each other in an economy
2
Q
Three functions of the price mechanism
A
Rationing
Signalling
Incentive
3
Q
Rationing Function
A
The price mechanism rations goods. When price increases, people can no longer afford the good. Limited resources are therefore rationed and only given to those who can afford the good
4
Q
Signalling Function
A
The price mechanism can indicate that when prices rise, producers would want to make more of the product because it maximises profit. Changes in market conditions indicates to firms on what they should do
5
Q
Incentive Function
A
The price mechanism can act as an incentive through if prices of a good rises, it encourages the firm to produce more of the good to maximise profit
6
Q
A
