1.2.7. price mechanism

• What does the price mechanism do in a free market economy?

  It allocates resources
• How is price determined in a market?

  By the interactions of demand and supply
• What happens when buyers want to purchase more than suppliers want to sell?

  Prices rise
• What did Adam Smith describe regarding the market?

  The 'invisible hand' of the market
• What is the rationing function of the price system?

  It rations goods based on affordability and desire
• How does the price mechanism signal resource allocation?

  When prices rise, producers move resources into manufacturing that product
• How does the price mechanism affect consumer behavior?

  Low prices encourage consumers to buy more, while high prices discourage buying
• What is the incentive function of the price mechanism?

  It encourages people to work hard and produce more
• How did the pandemic affect food prices in British supermarkets?

  High demand and low supply caused food prices to rise
• What impact did the coronavirus pandemic have on local markets?

  It disrupted supply chains and led to fewer goods available
• What is the national price discrepancy in housing attributed to?

  Multiple factors including population density and economic activity
• Why are house prices high in London?

  Due to high population and demand for housing
• What does the high price of housing in London encourage firms to do?

  Allocate resources to produce more houses
• What was the effect of the OPEC oil embargo in 1973?

  It restricted oil supply and raised prices globally
• How did the high prices of oil during the embargo affect consumers?

  It deterred consumers who didn't value oil highly