How the Price Mechanism Works in Markets

The video explains the price mechanism in markets, highlighting its three main functions: incentive, rationing, and signalling. The incentive function motivates agents to adjust their behavior to reach equilibrium. The rationing function allocates limited supply by adjusting prices, excluding some consumers. The signalling function informs market participants of changes in conditions. Understanding these functions is crucial for comprehending how markets operate and the impact of price interventions.

What role does the incentive function play in the price mechanism?

• It prevents prices from changing.

• It provides information about market conditions.

• It excludes consumers from the market.

• It motivates suppliers to adjust their output.

Which function of the price mechanism helps in reaching market equilibrium by motivating suppliers?

• Equilibrium function

• Signaling function

• Incentive function

• Rationing function

How does the rationing function affect consumers when prices rise?

• It encourages all consumers to buy more.

• It excludes some consumers from the market.

• It stabilizes the market price.

• It signals suppliers to produce less.

What happens to consumers when the rationing function is in effect due to a price increase?

• Consumers receive more information about the market.

• Consumers are encouraged to buy more.

• All consumers continue to purchase the same quantity.

• Some consumers are excluded from the market.

What is the primary purpose of the signaling function in the price mechanism?

• To prevent price fluctuations.

• To inform market participants about changes in conditions.

• To exclude consumers from purchasing goods.

• To motivate suppliers to increase production.