the price mechanism

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

  Resources
• How is price determined in a market?

  By the interactions of demand and supply
• What happens to prices when demand exceeds supply?

  Prices rise
• What does Adam Smith refer to when discussing the market?

  The 'invisible hand'
• What are the functions of the price mechanism?

  • Rationing function
  • Signalling function
  • Incentive function
• What is the rationing function of the price system?

  It allocates goods based on affordability using prices to limit/increase access to goods and services when supply is low/high
• What happens when prices increase in terms of consumer behavior?

  Some consumers can no longer afford the product
• How does the signalling function of the price mechanism work?

  It indicates where resources should be allocated
• What does a rise in price indicate to producers?

  To move resources into manufacturing that product
• What is the incentive function of the price mechanism?

  It uses prices to encourage producers to supply more goods and services when demand is high
• How do low prices affect consumer behavior?

  They incentivize consumers to buy more
• What impact did the coronavirus pandemic have on local markets?

  It disrupted supply chains and reduced imports
• How did the pandemic affect food prices in British supermarkets?

  Food prices rose due to high demand and low supply
• Why do house prices differ across the UK?

  Due to varying demand and supply factors
• What is a reason for high house prices in London?

  High population relative to the rest of the UK
• How do high house prices in London affect resource allocation?

  They incentivize firms to produce more houses
• What was the effect of the OPEC oil embargo in 1973?

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

  They deterred consumers who didn't value oil highly
• What does raising the price of oil achieve in the market?

  It returns the market to a state of equilibrium
• money

  is a medium of exchange, a unit of account and a store of value that is used to allow trade