Individual Economic Decision Making

Behavioural Economics vs Traditional Economics

What are the four main functions of the Price Mechanism?

Allocate

Rationing

Signalling

Incentives

Define Signalling Function

Changes in price provide information to both producers and consumers about changes in market conditions

Define the Rationing Function

When there is a shortage of a product, price will rise and deter some consumers from buying the product. Price can ration scarce resources, it modifies behaviour. 

Define the Incentive Function

Illustrating than an incentive is something that motivates consumer or a producer to follow a course of action or to change behaviour.

e.g. higher prices mean incentive for producers for higher revenues and possibly higher profits

e.g. lower prices provide incentives for consumers to maximise their utility