Price Mechanism

• What is price mechanism ??

  It refers to the system where the forces of demand and supply determine the price of goods.
• Price mechanism is divided into three functions

  • Rationing
  • signalling
  • Incentive
• Rationing function??

  occurs because increased demand or reduced supply of a product will lead to a price rise.

  Rationing is done when the product is their unaffordable for most or it is scarce so it must be rationed in its use.
• Incentive function??

  Occurs because a consumer or producer is motivated to a course of action e.g higher prices will incentivise a producer to supply more of a good or service.

  Higher prices=rise in profit
• Signalling function??

  Occurs because changing prices give a signal to consumers and producers as to whether to leave or enter a market. e.g. higher prices suggests that consumers should buy less.
• Mass market??

  Targets all consumers.
• Mass market is not segmented.
• Suppliers tend to produce in bulk which then leads to lower unit costs. What does this allow firms to do?


  This low cost strategy allows firms to sell high volumes at low prices.
• Niche market??

  Identifies small gaps in market and is well define with distinct characteristics.
• What does this form of specialism mean?

  Firms can often charge higher prices.