1.2.7: Price Mechanism

• Rationing: Limited resources are rationed by allocating them to people who can afford them and will pay the most for them. This is done by increasing prices so some will not be able to buy
• Signalling: When prices rise, producers move resources to manufacture the product that has increased price. This indicates to producers and consumers that market conditions and therefore equilibrium have moved
• Incentive: Low prices act as incentive for consumers to buy more of a good and high prices act as incentive for suppliers to sell more of a good