What is the Incentive function?

• What is the Incentive function?:

  • Prices create incentives for producers to alter their economic behaviour
• Prices are signals that influence producers' decisions about what they produce and how much they produce.
• What is the Incentive function?

  • A higher price for a good creates incentive for a producers to supply more of a good or service as the believe that larger profits can be made
• The Incentive Function - A lower price for a good creates an incentive for a producer to reduce production because it will not make large enough profit margins
• Incentive Function - If there is no demand for a product then firms have little incentive to produce it
• The Incentive Function - If there is a shortage of a product then the price rises which encourages firms to increase output and suppliers to bring goods onto the market from storage