1.2.7 Price mechanism summary
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13 Terms
Basic Economic Problem
The situation where there are infinite wants and scarce resources.
Economic Study
Economics is the study of how we solve the basic economic problem.
Market Economy
An economy where scarce resources are allocated through supply and demand interactions.
Price Mechanism
The use of prices to manipulate supply and demand and reach market equilibrium.
Rationing Function
A function of prices that allocates scarce resources to those who can afford to pay.
Signalling Function
A function of prices that indicates to producers where and how to allocate resources.
Incentive Function
A function of prices that alters the behavior of consumers and producers.
Scarcity
A situation where resources are limited in availability.
Ceteris Paribus
A Latin phrase meaning 'all other things being equal' used in economic analysis.
Equilibrium Price
The price at which the quantity demanded equals the quantity supplied.
Excess Demand
The situation where the quantity demanded exceeds the quantity supplied at a given price.
Shortage
A situation where demand surpasses supply, leading to a shortage of goods.
Allocate Resources
The process of distributing resources based on supply and demand signals.
