Signalling function
Definition. The signalling function is the role of price in the price mechanism whereby changes in price convey information to consumers and producers about relative scarcity and changing market conditions. A rising price signals that a good has become scarcer or more wanted, and a falling price signals the opposite.
Alongside the incentive and rationing functions, the signalling function guides decisions and helps coordinate a market economy without central direction. These price signals prompt resources to move towards their most valued uses.
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.
Want to use signalling function for marks in the exam? Learn it in class or message the team.