Price Mechanism | A-Level Economics Notes
These revision notes cover everything you need to know about the Price Mechanism for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What are the three functions of the price mechanism?
The price mechanism allows goods and services to be allocated efficiently.
The three main functions of the price mechanism are:
- rationing
- signalling
- incentivising
What is the signalling function?
The signalling function means that consumers and producers are able to find out when there are changes in a market e.g. excess demand or excess supply.
Whenever there is excess demand, firms will notice this through long queues/busy stores/stock selling out quickly.
Whenever there is excess supply, firms will notice this through short queues/empty stores/excess stock.
What is the incentive function?
Due to the incentive function, higher prices lead to an expansion in market supply.
Due to the incentive function, lower prices lead to a contraction in market supply.
Firms are likely to allocate their factors of production to produce the goods and services that are most profitable to sell.