Price Mechanisms

T1 CC3 (Keywords)

Price Mechanism

The mechanism through which price is determined in a free market system. The forces of demand and supply to reach equilibrium.

Signalling Function

Changes in price help determine when and how resources are allocated by firms

Incentive function

Changes in price act to encourage or discourage behaviour by economic agents

Rationing function

When demand is greater than supply the rising price acts to reduce demand for goods and services

Utility

Theoretical measure of consumer benefit/enjoyment/satisfaction from using a good or service

Marginal Utility

The change in consumer benefit from each additional unit of a good or service used.

Diminishing Marginal Utility

The assumption that increased consumption of a good or service will lead to reducing additional utility

Rational Consumer

A consumer who makes choices with a focus on maximisation of their private benefits

Behavioural Economics

Adding elements of psychology to traditional Economics to better understand how economic agents make decisions

Herding Behaviour

Where decisions are highly influenced by the actions of the collective group rather than the individual

Habitual Behaviour

Where consumers repeat a purchase or choice, as a default option, without considering alternatives

Computational Weakness

Where consumers make irrational choices, as they are unable to correctly calculate the probability of something happening when they make a purchase or choice