Econ edexcel a level notes theme 1, Study notes of Economics

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e The price mechanism (the invisible hand) determines the market price e Resources are allocated through the price mechanism in a free market economy. The economic problem of scarce resources is solved through this. The price moves resources to where there is demand or a shortage and moves resources away from where there is a surplus. Rationing: e When there are scarce resources price increases due to excess demand. The increase in price discourages demand and rations resources and it is a disincentive for consumers to continue purchasing. Incentive: e This encourages a change in behaviour of the producer or consumer. For example a high price would encourage firms to supply more to the market as it is more profitable to do so. Signalling: e The price changing acts as a signal to new firms and consumers entering the market. The price changes show where resources are needed within the market. A high price signals firms to enter the market as itis more profitable to do so. However this encourages consumers to decrease demand and leave the market.