Functions of the Price Mechanism
Competitive Market Equilibrium
AO2
Syllabus requirement
Explains how prices signal information, provide incentives, ration goods, and allocate resources.
Assessment objectives
AO2 Application and Analysis
Summary
This topic explains how the price mechanism—interaction of demand and supply—allocates scarce resources in a market. It covers the signalling and incentive roles (which guide where resources move) and the rationing role (which limits access when demand exceeds supply). Understanding these functions shows how prices coordinate producer and consumer behaviour and preserve scarce resources.
