Price Mechanism + 4 Functions

• The functions of the price mechanism include signaling excess demand and incentivizing firms to increase output to make more profit.
• When the demand curve shifts to the right, it shifts at the initial price in the market, which is P1.
• The disequilibrium that exists when a curve is shifted can be found by extending P1 across to find the new demand, which is all the way over here, where supply has remained at q1, resulting in an excess demand.
• Firms are able to correct the problem of excess demand by increasing their output to meet the increased demand.
• Higher prices signal the fact that there has been excess demand for both consumers and producers.
• Higher prices also signal the need for more resources in this market.
• Higher prices incentivize firms to increase their output to make more profit.
• Higher prices can lead to new firms entering the market or existing firms increasing output by investing in new capacity or using spare capacity.
• Higher prices can also cause consumers to bid up their prices, indicating their desperation to buy the good or service.
• Access Division puts upward pressure on prices.
• At higher prices, the functions of the price mechanism kick into gear, leading to an equilibrium quantity of quantity Q2.
• Excess supply puts downward pressure on prices.
• The new equilibrium, represented by quantity Q2, is at equilibrium and achieves allocative efficiency.
• An excess supply, also known as a surplus, occurs when supply is greater than demand.
• Lower prices ration scarce resources by encouraging more demand, as shown by the expansion or the extension along the demand curve.
• An excess demand or an excess Supply is a disequilibrium.
• The contraction along the supply curve shows the effect of producers reducing output due to lower prices.
• The functions of the price mechanism work in getting from one equilibrium to a new equilibrium for a demand shift to the right and a supply shift to the right.
• There are two shifts left, a demand shift to the left and a supply shift to the left.
• Lower prices incentivize producers to reduce output instead of liquidating stocks.
• A supply shift to the right will cause the supply curve to shift at the initial price in the market, which is P1.
• The functions of the price mechanism, including the incentive function and the rationing function, are responsible for getting from one equilibrium to a new equilibrium.
• Lower prices first signal that there has been an excess supply to both consumers and producers, and they also signal the need for fewer resources.
• The reallocation of resources is achieved with a higher quantity at higher prices.