Incentive function
Definition. The incentive function of the price mechanism refers to the way changes in price encourage producers and consumers to alter their behaviour in their own interest. A higher price gives producers an incentive to supply more in pursuit of greater profit, while it encourages consumers to economise on the good.
Together with the signalling and rationing functions, the incentive function guides the reallocation of resources towards goods that are relatively scarce and away from those in surplus.
This term belongs to The Price Mechanism and Its Functions in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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