Market mechanism
Process by which price is determined through S and D.
Price mechanism
Key definitions
Rationing function
Price allocates scarce goods to those willing and able to pay.
Incentive function
Higher prices encourage firms to increase supply.
Signalling function
Price changes signal where resources are most profitable.
Equilibrium
S = D.
Excess demand
D > S.
Excess supply
S > D.
Profit motive
Firms respond to price signals to maximise profit.
Entry
New firms join when prices rise.
Exit
Firms leave when prices fall.
Invisible hand
Self-interest coordinated through markets.
Key concepts
Rationing: price limits who can buy when resources are scarce.
Incentive: higher prices encourage more production.
Signalling: rising prices attract firms to profitable markets.
Relevant tips
- Link all three functions in 10-mark micro essays.