Quick questions on The price mechanism and resource allocation - WJEC A-Level Economics

In a pure market economy, the questions of what to produce, how to produce it and for whom are answered by prices rather than by a planner. If consumers want more of a good, their increased demand raises its price, which makes it more profitable to produce, drawing resources in; if a good falls out of favour, its price falls and resources leave. Adam Smith called this coordination the "invisible hand". The strength of the system is that it is decentralised, responsive and creates strong incentives; its weakness is that it ignores externalities, public goods and equity, the failures examined elsewhere in the unit.

These functions work together. When a poor harvest cuts the supply of wheat, the price rises: it rations the smaller crop to the highest-value uses, signals scarcity to farmers and buyers, and gives farmers an incentive to plant more wheat next season while encouraging consumers to economise. No one organises this; the price does the work. The same logic reallocates resources when a new technology, fashion or shortage appears, which is why market economies adapt quickly to change.

Name the three functions of the price mechanism. [3 marks]

Explain one way in which behavioural economics challenges the assumption of rational behaviour. [3 marks]