1.2.7 Price Mechanism

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Lily Cope

Cards (3)

  • The price mechanism determines the market price.
  • Resources are allocated through the price mechanism in a free market economy, the economic problem is solved through this mechanism. The price moves resources to where they are demanded or where there is a shortage, and removes resources from where there is a surplus.
  • Main Functions Used by the Price Mechanism to Allocate Resources
    1. Signalling
    2. Incentive
    3. Rationing