Economics (AS)·Price mechanism, consumer & producer surplus · NSSCAS 2.1d
The price mechanism, consumer & producer surplus
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Last lesson we found the market's equilibrium price. Now we ask what that price actually does for the whole economy. The price mechanism is the market's 'invisible hand', and it works through three functions — rationing, signalling, and acting as an incentive that transmits our preferences. We'll watch a single rise in demand set all three working at once, then measure the benefit buyers and sellers gain from trading, using consumer surplus and producer surplus, and draw both as shaded triangles on the demand-and-supply diagram.
What you'll learn in this lesson
By the end you should be able to (NSSCAS Economics (AS) 2.1d):
- Evaluate the functions of the price mechanism: rationing, signalling and the transmission of preferences
- Discuss how rationing, signalling and the transmission of preferences are affected by changes in equilibrium price and quantity
- Differentiate between consumer and producer surplus
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