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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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