What is the “rationing function” of prices?
Question: I understand that quantity demanded and quantity supplied change as the price change for a good/service, but I am still confused as to what the rationing function of prices means! What does it mean exactly? Answer: Suppose that (in some insane, Bizarro-world universe) you and a friend both want to buy the new Backstreet Boys CD. However, because the CD store only has one copy left, it’s raised the price to $50. Your friend is a fanatic about the Backstreet Boys. His dorm room walls are plastered with Backstreet Boys posters. He tries to dress like them and act like them, and has even stalked them on several occasions. He will pay almost any price to get that CD. You, on the other hand, are only mildly interested in the CD and won’t pay more than $15 for it. The rationing function of price means that (other things being equal) the CD will go to the person who wants it the most. The same applies to other goods.
