2.4 Price

Question 1

Explain ways for how price determines efficient resource allocation

Answer 1

• Price signalling
• Transmission of preferences
• Rationing

Question 2

Explain price as a reflection of worth

Answer 2

• Price is used to indicate worth (how much you value something)
• Worth varies on fashion, peoples differences etc
• Price and worth tend to be very similar (willing to pay a high price for something you really want)

Question 3

Define price signalling

Answer 3

Prices signal where resources are needed. If price rises, more resources are allocated to that area

Question 4

Define price

Answer 4

The sum of money which has to be paid for a good or service

Question 5

Define transmission of preferences

Answer 5

By making choices, producers indicate their needs. Higher prices encourage owners of resources to supply more to producers

Question 6

Define equilibrium price and quantity

Answer 6

Where the quantity supplied exactly matches the quantity demanded

Question 7

Define rationing

Answer 7

Where resources are scarce, price rises so that demand equals supply

Question 8

Define determination of price

Answer 8

The interaction of the market forces of demand and supply to establish the general level of prices for a good or service

Question 9

Define allocation of resources

Answer 9

How scarce resources are distributed among producers and how scarce goods and services are allocated among consumers

Question 10

Explain the role of markets in the determination of price

Answer 10

• If price is too high, demand is lower than supply leading to a decrease in price until demand equals supply
• If price is too low, demand is greater than supply leading to a increase in price until demand equals supply

Question 11

Explain the role of markets in the allocation of resources

Answer 11

Stage 1: Owners of factors of production sell their resources for the highest price to the highest bidder
Stage 2: Firms buy the resources and produce goods and services to sell that people will buy in order to make a profit
Stage 3: Consumers buy goods and services which they most desire with their limited income gained from selling their resources

Question 12

Define market forces

Answer 12

The factors that determine price levels and the availability of goods and services in an economy without government intervention