Chapter 13

Question 1

What’s the price mechanism?

Answer 1

Allocates resources between conflicting uses

Question 2

What are the 3 main functions of the price mechanism?

Answer 2

The rationing function
The signalling function
The incentive function

Question 3

What’s the rationing function?

Answer 3

Resources are scarce so are rationed between competing uses. e.g

high demand, low supply——> price + ———> demand -

Question 4

What’s the signaling function?

Answer 4

The price is used as a signal for both the consumers and suppliers to determine whether they should increase supply/ demand.

Question 5

What’s the incentive function?

Answer 5

Price acts as an incentive to supply/ demand more.