This is a revision resource on some of the key functions of the price mechanism.
In this revision video we will look at the key functions of the price mechanism and then work through a small selection of past paper multiple-choice questions so that you can test your understanding
The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources.
The free-market price mechanism clearly does NOT ensure an equitable distribution of resources and can lead to market failure.
Changes in market price act as a signal about how scarce resources should be allocated.
A rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product (therefore rationing the product).
A fall in price leads to an extension of demand but makes it less profitable for a business to supply the good or service affected.
One important feature of a free-market system is that decision-making is decentralised, i.e. there is no single body responsible for deciding what to produce and in what quantities.
This is in contrast to a planned (state-controlled) economic system where there is significant intervention in market prices and state-ownership of key industries.
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