Functions of the Price Mechanism
- The price mechanism is the interaction of demand and supply in a market economy that allocates scarce resources amongst competing needs and wants
- Adam Smith referred to the functions of the price mechanism as the 'invisible hand of the market'
- The price mechanism fulfils three functions in the relationship between buyers and sellers which include rationing, incentivising and signalling
- When any of these functions breaks down, market failure can occur
Functions of the Price Mechanism
Function |
Explanation |
Rationing |
|
Incentive |
|
Signalling |
|