Follow by Email

Wednesday, 24 August 2011

Word of the Day

Functions of price

1. The signalling function

Prices give information to consumers to help them decide what they should buy. A simple example would be to take the example of cameras. If a disposable camera is more expensive than a digital camera, then this conveys information to the consumer that a digital camera may have more functions, take better pictures, be easier to use…etc.

2. The rationing function

Prices can allocate resources accordingly given that consumers have a fixed income. It rations and allocates scarce resources among competing uses. For example, if my income was fixed at £20,000 per annum, I may choose not to buy a £150 handbag because my income may not support such a purchase. However if my income was £170,000 per annum, I might choose to purchase the handbag because I can afford to given my income levels.

3. The incentive function

Prices create incentives for consumers to alter their economic behaviour. For example, if a retailer cuts the price of bread by 50%, consumers are given incentives to buy a loaf of bread. This is because a loaf of bread is cheaper relative to other goods that the same amount of money can buy.

No comments: