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Price determination and mechanism (Role of economic incentives (Rationing…
Price determination and mechanism
Price mechanism
Forces of supply and demand work together
They determine prices and quantities of goods and services
Signalling function
A decrease in price gives an indication to producers to decrease supply
Decrease in price will give an indication to consumers that they should increase demand
An increase in price gives indication to consumers to reduce demand
Signals will lead to shifts in supply or demand
Increase in price tells producers that they should increase supply
Incentive function
As price rises, revenue and profit also increases
Movement along supply curve shows increase in quantity supplied
This is due to greater contribution per unit
Higher prices act as a motivator for a producer to increase supply of a good
Also shows increase in price
Rationing function
Price will lead to reduction in demand
Leads to the rationing of the product as its use is restricted
This is due to scarcity
Excess demand for a good or service will lead to a rise in the price of a good
There will be movement along the demand curve showing a decrease in quantity demanded
Role of economic incentives
Rationing function happens because of an increase in demand or an increase in supply
Signalling function happens because of changing prices give a signal to consumers and producers if they leave or enter a market
Based on the price mechanism, the methods of which goods and services are achieved
Incentitive function happens because a consumer or producer is motivated to a cause of actions like higher pries
Provides reasons for economic agents to provide goods
This will incentivize a producer to supply more goods
Impact of changes in demand and supply on equilibrium
Shift in demand
Prices of other goods
Factors like adverts
An rise in trends and fashions
Side effects
An increase in consumer income
Shift in supply
Impact of changing costs
Increase cost of raw materials
Government policy
End of conflict
An increase in technology process
Prices of other goods
Expectations