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You are expected to explain/analyze (AO2) the functions of the price mechanism (SL+HL)
The price mechanism refers to the forces of supply and demand determine the price and quantity of goods and services. There are 2 functions of the price mechanism:
Resource Allocation (Signalling and Incentives)
Rationing
Resource Allocation: Signalling and Incentives (AO2)
Resource Allocation: Signalling and Incentives (AO2)
Signalling: If the price of a good or service increases, it signals to producers that there is high demand for it, and they will produce and supply more of it.
Incentives: If the price increases, firms can now earn more money by supplying their good or service, meaning they will produce and supply more of it (there is an incentive for firms to produce more: 💰)
Rationing (AO2)
Rationing (AO2)
If there is more quantity demanded than quantity supplied for a good or service, the price will increase, as producers can earn more from the same number of customers. This helps preserve (ration) the limited supply of the good/service.
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