1.2.7 Price mechanism

• What's the 3 functions of price mechanism to allocate resources?

  - Rationing, incentive and signalling function
• Rationing function

  Prices act as a rationing mechanism to allocate scarce resources among competing uses.

  
  

  When demand exceeds supply, prices rise, discouraging some consumers from buying, and ensuring that goods are allocated to those willing to pay the highest prices.
• Incentive function

  Prices provide incentives for producers to allocate resources efficiently.

  
  

  Higher prices indicate increased demand, motivating producers to produce more of a particular good or service.

  
  

  Lower prices signal decreased demand, encouraging producers to reallocate resources to more profitable uses.
• Signalling function

  Prices convey information about changing market conditions, allowing consumers and producers to make informed decisions.

  
  

  Rising prices may signal potential shortages, prompting consumers to conserve and producers to increase supply.

  
  

  Falling prices may indicate oversupply, prompting consumers to buy more and producers to cut back on production.
• Price mechanism in Local markets

  In local markets, prices are determined by supply and demand conditions within a specific geographic area.

  
  

  Local factors, such as weather or local preferences, can influence prices.

  
  

  Example: The price of fresh produce at a local farmers' market may vary based on seasonal factors and local supply.
• Price mechanism in National markets

  National markets cover an entire country and consider supply and demand at a broader scale.

  
  

  National policies and regulations, such as taxes and trade policies, can impact prices.

  
  

  Example: The national housing market may be influenced by government policies related to interest rates and mortgage regulations.
• Price mechanism in Global markets

  Global markets involve international trade and can be influenced by factors like currency exchange rates, global supply chains, and geopolitical events.

  
  

  Prices in global markets are interconnected and can impact local and national markets.