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Chapter 4: Q. 4.3 (page 75)

Understand the rationing function of prices

Short Answer

Expert verified

To adjust the mismatch in demand and supply by the change in prices.

Step by step solution

01

Step1. Introduction

The demand and supply in a market can not always be equal to eachother and equilibrium can not always be attained this way.

Prices perform the rationing function in such scenarios.

02

Step2. Explanation

The rationing function refers to discouraging or encouraging demand to adjust to the supply. For instance, when there are not enough resources, i.e. the supply is scarce. Demand exceeds supply hence price will rise under its rationing function, thus lowering down the demand and matching it with the available supply.

This function is called the rationing function of prices.

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Most popular questions from this chapter

There are simultaneous changes in the demand for and supply of global-positioning system (GPS) devices, with the consequences being an unambiguous increase in the market clearing price of these devices but no change in the equilibrium quantity. What changes in the demand for and supply of GPS devices could have generated these outcomes? Explain.

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When firms respond to minimum wage increases by shutting down entirely, who else is harmed besides their employees?

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