Transcript The Functions of Price

The Functions of Price
Lesson Objectives:
1. Explain the 3 key functions of price
2. Examine the functions of price in a
number of real life scenarios
3. Improve the detail and accuracy of
the analysis in the 9 mark questions
…Starter Question…
• What do we mean by the term ‘Market’ in
economics?
Functions of the Price
Mechanism
(1) The signaling function
– Demand for a product is strong from consumers,
sends a signal to suppliers that they should increase
prices to clear the market. Without a rise in prices
there would be excess demand, a shortage.
– These higher prices they can now charge, send a
signal to the producer to increase output. The higher
market prices act as an incentive to raise output
because the supplier stands to make a higher profit,
as a consequence we see an extension in supply.
The Signalling Mechanism in Action
Falling gas prices would send a
signal that coal-fired power
generation may not be very
profitable
Functions of the Price
Mechanism
(2) The rationing function
– Prices serve to ration scarce resources when
demand in a market outstrips supply
– When there is a shortage of a product in the market,
the price will rise and thus deter some consumers
from purchasing the product
– Some consumers who lack the effective demand (i.e.
purchasing power) will be “priced out of the market”. It
is the higher ‘rationing’ prices which cause demand to
contract.
The Rationing Function in action
Auctions
can separate
those who
can pay
from those
who cannot
Toll roads such as the M6
Toll are a way of rationing
scarce road space
Functions of the Price
Mechanism
(3) The Incentive function.
• Low prices act as incentives to buyers,
they encourage them to buy more goods.
• Higher prices also act as an incentive for
new firms to enter the market and increase
supply. Where as low prices discourage
production.
Task
•
For all 9 mark questions, you must explain
(a) what curve shifts and why, referring to your diagram
(b) Explain what this will do to price (referring to you
diagram) and explaining why price does this
(c) Explain why this leads to an extension or contraction
in demand/supply and
(d) State the impact on the quantity bought and sold.
Hint: Every answer should contain a reference to one
of the functions of price.
Example…
“With the aid of a diagram explain the effect on the market
for iPods following a successful advertising campaign
on TV by Apple.”
Task Questions
Hint: Remember to refer explicitly to at least one of the functions of
price in your answer
1. With the aid of a diagram, explain the
effect on the market for strawberries after
a season of poor weather.
2. With the aid of a diagram, explain the
effect on the market for Nike Sports
equipment following a fall in the price of
Adidas goods.