ECONOMICS
MARKETS AND PRICES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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an increase in demand, leading to a rise in price, will encourage new firms to enter themarket.
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when there is a shortage of a product, the price will rise and deter some consumers from buying the product.
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changes in price provide information to both producers and consumers about changes in market conditions.
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if a product is scarce, a rise in price is likely to make the shortage worse.
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Detailed explanation-1: -The adjustment of price is the rationing mechanism in free markets. Price rationing means that whenever there is a need to ration a good-that is, when a shortage exists-in a free market, the price of the good will rise until quantity supplied equals quantity demanded-that is, until the market clears.
Detailed explanation-2: -The rationing function of the price mechanism Whenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of such a price rise is to discourage demand, conserve resources, and spread out their use over time.
Detailed explanation-3: -A rationing mechanism is a system for choosing who gets how many goods during a shortage. Long lines are often used to ration goods in shortage (so the good is distributed on a first-come, first-serve basis). In addition, black markets often develop as a way of rationing goods that are in shortage.
Detailed explanation-4: -In a free market economy, where prices are allowed to take its own course, open inflation occurs. 2. Suppressed Inflation: When government prevents price rise through price controls, rationing, etc., it is known as Suppressed Inflation.