ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -These changes in price indicate and motivate-this is called the signalling and incentive functions. Changes in price indicate the relative strength of consumer demand and signal to producers the changes in demand for their goods or services.

Detailed explanation-2: -The incentive function of the price mechanism producers to supply more because they provide the possibility or more revenue and increased profits. The incentive function of a price rise is associated with an extension of supply along the existing supply curve.

Detailed explanation-3: -In fact, this function of prices may be analyzed into three separate functions. First, prices determine what goods are to be produced and in what quantities; second, they determine how the goods are to be produced; and third, they determine who will get the goods.

Detailed explanation-4: -As the price mechanism determines what consumers spend their money on it also determines how scarce resources are allocated (used). Prices have three seperate functions: rationing, signalling and incentive functions.

Detailed explanation-5: -Prices send signals and provide incentives for buyers and sellers in ways you possibly never thought about. In a market economy, price signals prevent massive shortages and ensure that consumer wants are largely satisfied.