Functions of prices
If the price of new movies goes up, it tells movie studios they should make more of them.
What is the signal that prices send to producers?
An economy where people rely on traditions passed down for generations to decide what to produce.
What is a traditional economy?
This is the total amount of money a company takes in from selling its products, before paying any costs.
What is revenue?
The risk of losing money if a company's new product doesn't sell as well as they hoped.
What is strategic risk?
Two businesses, like a pizza place and a taco stand, competing for the same consumer's lunch money.
What is indirect competition?
In times of scarcity, prices perform this function by discouraging people from buying too much of a rare item.
What is the rationing function of prices?
In this economic system, the government controls what goods and services are made.
What is a command economy?
The cost of rent for a store is an example of this, as it stays the same each month.
What are fixed costs?
The risk of a company's computer system getting hacked and customer information being stolen.
What is operational risk?
When companies compete using factors like customer service, warranties, or being open 24/7, instead of just using price.
What is nonprice competition?
A high price for a popular new toy encourages other companies to create similar toys.
What is the incentive function of prices?
This system is driven by supply and demand, with little government involvement.
What is a market economy?
The cost of ingredients for a restaurant is an example of this, because it changes depending on how many meals are sold.
What are variable costs?
This is the risk that a company will be unable to pay back money it borrowed.
What is financial risk?
Two companies, like McDonald's and Burger King, offering very similar products to the same customers.
What is direct competition?
Prices make sure that economic resources, like labor and land, are used to produce what people want most.
What is the resource allocation function of prices?
The U.S. has this type of economic system because it combines private businesses with some government services.
What is a mixed economy?
These are the costs a company has to pay in order to operate, such as salaries, rent, and supplies.
What are operating expenses?
The danger of a negative news story causing a company's sales to drop.
What is reputational risk?
A market with many sellers offering slightly different products, like the market for soft drinks.
What is monopolistic competition?
When the price of a product is high, the people who helped make it can be paid more.
What is the income distribution function of prices?
This system is also known as a free enterprise system because individuals own and control the factors of production.
What is capitalism?
Factors outside a company's control, like a new government regulation or a sudden change in customer trends, can affect this.
What are external factors?
This risk is when a company breaks a law or regulation and has to pay a big fine.
What is compliance risk?
A market with many sellers, identical products, and no barriers to entry, like the market for corn or wheat.
What is perfect competition?