Market Economy MCQ 4 (Price Mechanism)

The Rationing Function of the Price Mechanism

• When the price of a good rises due to scarcity or shortages, it discourages consumption, conserving resources.

• For example, a sharp increase in oil prices due to scarcity would lead consumers to be more careful with their fuel use and ration their consumption.

• When prices rise, some consumers are deterred from entering the market, leaving only those who are willing and able to pay the higher prices.

• For example, high rents in Dublin deter many people from renting, leaving only those who can afford the high rents in the rental market.

Market Equilibrium

• The equilibrium price is the price at which the quantity supplied equals the quantity demanded, ensuring no unsold stock (excess supply) and no unsatisfied customers (excess demand).
• Excess supply (surplus) occurs when the quantity supplied exceeds the quantity demanded, resulting in a surplus of goods.
• Excess demand occurs when the quantity demanded exceeds the quantity supplied, resulting in a shortage of goods.
• To achieve equilibrium, suppliers must adjust prices to match the quantity supplied with the quantity demanded.

The Rationing Function of the Price Mechanism

• When the price of a good rises due to scarcity or shortages, it discourages consumption, conserving resources.

• For example, a sharp increase in oil prices due to scarcity would lead consumers to be more careful with their fuel use and ration their consumption.

• When prices rise, some consumers are deterred from entering the market, leaving only those who are willing and able to pay the higher prices.

• For example, high rents in Dublin deter many people from renting, leaving only those who can afford the high rents in the rental market.

Market Equilibrium

• The equilibrium price is the price at which the quantity supplied equals the quantity demanded, ensuring no unsold stock (excess supply) and no unsatisfied customers (excess demand).
• Excess supply (surplus) occurs when the quantity supplied exceeds the quantity demanded, resulting in a surplus of goods.
• Excess demand occurs when the quantity demanded exceeds the quantity supplied, resulting in a shortage of goods.
• To achieve equilibrium, suppliers must adjust prices to match the quantity supplied with the quantity demanded.

Learn about how the price mechanism helps conserve resources by discouraging consumption during scarcity/shortages. Understand how rising prices impact consumer behavior and rationing.