a) Price mechanism (Incomplete)

a) functions of the price mechanism to allocate resources: rationing, incentive, signalling

price mechanism = the interaction between supply and demand that determines prices, which determines where scarce resources need to be allocated

functions of the price mechanism

• rationing = prices discourage demand for goods and services in order to ration resources

  • high price

    • this means → demand shifts right

    • good or service requires scarce resources

    • demand is discouraged → scarce resources are rationed to those more willing to pay a higher price

• signalling = prices convey information about which markets require more resources

  • high price

    • this means → demand shifts right

    • good or service is in high demand

    • firms are informed that they should enter the market to make a profit → quantity supplied increases

• incentivising = prices incentivise firms to allocate resources towards more profitable markets

  • high price

    • this means → demand shifts right

    • good or service will make a high profit

    • firms are incentivised to allocate resources to this market to make a profit → quantity supplied increases