Transcript Topic 1.2.7 price mechanism student versionx

1.2.7 Unit content
Students should be able to:
• Describe the functions of the price
mechanism to allocate resources
(rationing, incentives and signalling)
• Give examples of the price mechanism in
the context of different markets, including
local, national and global markets
Excess supply
Draw a demand and supply curve showing
excess supply
Signalling function
This situation of excess supply is an
example of the signalling function of
price: the market __________ to
suppliers that they have oversupplied
the products and if they are to sell it the
price must _______
Incentive function
This also shows the incentive function:
the market is indicating to suppliers that too
many resources have been allocated to this
product as more has been produced than
consumers wish to buy.
As prices fall there is less _________ for
them to supply this market and a greater
incentive to supply other markets as profits
are likely to be _________
Excess demand
Draw a diagram to show excess demand.
Increased price – signals, incentives and rationing
The pressure on price is to rise and so price
is performing all three of its functions.
Increased prices _________ to suppliers that
more of its product needs to be produced.
Increased prices mean more profits for firms,
which creates ___________ to supply more.
As prices rise demand contracts along the
demand curve as consumers ____________
themselves until equilibrium is reached
Signals
Signals sent out by prices are very
important for the market to function
efficiently as at low prices they inform
consumers that the product is a bargain
(___________ the expected price) and
more of it should be consumed, while in
conditions of excess supply they signal to
suppliers that they should produce _______
Summary – price mechanism
The ________________is the way in which
resources are allocated in a market
economy.
Price ___________ the available resources
among competing buyers.
Prices ______ the strength of the market to
producers. Rising demand tends to push up
prices. This gives producers higher profits,
which act as an _________ to increase the
quantity supplied.
Summary – market mechanism
So the market mechanism is the process
by which market forces determine _______
The market mechanism can:
 cause supply to respond to changes in
demand
 eliminate excess supply and demand
 signal changes in consumer tastes
What won’t the market mechanism
necessarily ensure?
Example – fur coats
Assume that the demand for fur coats falls
because of lobbying from animal welfare
groups.
Draw a diagram showing this and write an
explanation – you must use the phrases:
• excess supply
• Signal (or signalling)
• Incentives
Example – oil
Assume that the supply of oil falls.
Draw a diagram showing this and write an
explanation – you must use the phrases:
• excess demand
• Signal (or signalling)
• ration
Agricultural markets
Agricultural markets are strongly affected
by supply conditions e.g. ____________
Prices tend to be volatile because of
changes in supply.
e.g. what happens to crops after a bad
winter? Sketch this.
Precious metals
Bauxite is a metal used to make aluminium.
Who buys aluminium (households or firms)?
What happens during a recession? Plot this
What would be the effect if supply was fairly
inelastic (unresponsive to changes in price)?
Oil
Why is the oil market so important?
Who is a key influence on the price of oil?
Graph showing oil prices over time
The housing market – owner occupiers
How do owner occupiers usually fund their
house purchase?
Are interest rates currently high or low?
What effect has this had on demand?
Plot this - what do you notice (explain your
graph)?
The stock market
What is the stock market?
Why do firms sell shares?
Stock market and the future
What happens if people believe that the
stock market will fall?