price determination.
price mechanism.
price mechanism: the interaction of supply and demand to determine prices.
functions of price mechanism:
– signalling
– incentivising
– rationing
if prices goes up we see a contraction in demand and an extension in supply:
– quantity demanded decreases because goods are more expensive
– quantity supplied increases because higher prices means more profit for producers
– leads to excess supply (seen on the diagram by yellow arrows).
– can be solved by reducing price to incentivise sales and reducing surplus.
– QS contracts, falling price signals to producers that consumers want fewer goods, so
reduces QS. falling price also reduces incentive to supply as there is less marginal profit
to be made, so reduces QS.
– most efficient solution to reduce price until supply = demand. (restoring market
equilibrium)
if price goes down we see an extension in demand and a contraction in supply
– quantity demanded increases because goods are cheaper
price mechanism.
price mechanism: the interaction of supply and demand to determine prices.
functions of price mechanism:
– signalling
– incentivising
– rationing
if prices goes up we see a contraction in demand and an extension in supply:
– quantity demanded decreases because goods are more expensive
– quantity supplied increases because higher prices means more profit for producers
– leads to excess supply (seen on the diagram by yellow arrows).
– can be solved by reducing price to incentivise sales and reducing surplus.
– QS contracts, falling price signals to producers that consumers want fewer goods, so
reduces QS. falling price also reduces incentive to supply as there is less marginal profit
to be made, so reduces QS.
– most efficient solution to reduce price until supply = demand. (restoring market
equilibrium)
if price goes down we see an extension in demand and a contraction in supply
– quantity demanded increases because goods are cheaper
