What is the Signalling Function?

• What is the Signalling Function?:

  • The Signalling function of prices is when prices provide information to buyers and sellers
• What is the Signalling Function?

  • Prices provide information that allows buyers and sellers in a market to plan and coordinate their economic activities
• What does an increase in prices indicate in a market?

  High demand from consumers
• How do suppliers respond to increasing prices?

  They increase production to meet demand
• What happens when there is excess supply in a market?

  The price mechanism helps eliminate the surplus
• How does the price mechanism affect market prices during excess supply?

  It allows the market price to decrease