Price Mechanism (1.3.4)

Price Mechanism

System in a free market economy where price changes, allocate scarce resources automatically.

Rationing Function

1. When resources are scarce, price increases due to excess demand.

2. High price acts as a disincentive, discouraging consumers, and rationing the remaining resources to those willing and able to pay

Incentive Function

1, Change in price.encourages consumers or producers to change behaviour (e.g high price incentives profit maximising firms to supply more to that market)

Signalling Function

1. Price changes acts as signs showing where resources are needed (e.g price of bread goes up, more yeast is allocated to bread manufacturers)

Price Mechanism in Niche Markets

1. More efficient than mass markets

2. Because niche markets are closer to consumer targeting their specific wants directly.

3. So resources are allocated more efficiently as rheu are allocated more precisely to where they are needed and wanted.

4. E.g a manufacturer is so close to their specialised customer base, that any change in demand gives them a direct signal. And know exactly what their customers want. Allowing them to shift their scarce resources quickly with zero wasted effort.