1.2.7

Question 1

What did Adam Smith describe?

Answer 1

Invisible hand of the price mechanism in which the hidden hand of the market operating thru pursuit of self-interest allocated resources in society’s best interests.

Question 2

What is the price mechanism?

Answer 2

Describes how decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses.

Question 3

Through choice consumers send info to producers about what?

Answer 3

Changing nature of needs and wants

Question 4

Higher prices act as an incentive to?

Answer 4

Raise output as suppliers stand to make a better profit

Question 5

When demand is weaker in a recession, supply contracts as?

Answer 5

Producers cut back on output

Question 6

Prices ration scarce resources when demand?

Answer 6

Outstrips supply

Question 7

What needs to happen in order for a competitive market to work efficiently?

Answer 7

All agents must respond to appropriate price signals in the market

Question 8

When does market failure occur?

Answer 8

When signalling and incentive functions fail to operate optimally leading to a loss of economic/social welfare

Question 9

When do secondary markets occur?

Answer 9

Buyers and seller are prepared to use a second-market to re-sell items that have already been purchased

Question 10

Incentives that consumers and producers have can be changed by?

Answer 10

Government intervention

Question 11

How can a government intervene?

Answer 11

Impose maximum and minimum prices

Question 12

What does the law of unintended consequences suggest?

Answer 12

That government intervention can often misguide or have unintended consequences