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CA Foundation · Business Economics · Nature and Scope of Business Economics

Onion prices in Nashik rise sharply after unseasonal rain destroys part of the crop. In a free market, the rise in price mainly performs which function?

The higher onion price signals scarcity, rations the limited supply to buyers who value it most, and gives producers an incentive to supply more. It does not guarantee unchanged consumption or fix costs, because quantity demanded falls as price rises.

  1. AIt signals scarcity, rationing limited supply to those most willing to pay and encouraging more supplyCorrect
  2. BIt guarantees that every consumer can buy the same quantity as before
  3. CIt permanently fixes the cost of production for farmers
  4. DIt eliminates the need for any demand by consumers

Explanation

Prices act as signals and rationing devices. A higher price shows scarcity, discourages less urgent purchases and encourages producers to supply more. It cannot guarantee unchanged consumption, since the higher price reduces quantity demanded.

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