3.1.13 the role of relative prices in the allocation of resources Flashcards
What happens when the relative price of a good increases?
Producers are incentivized to supply more of the good, while consumers may reduce their demand or switch to substitutes.
How do relative prices reflect scarcity?
Higher relative prices indicate greater scarcity of a resource, signaling firms to allocate more resources toward its production.
What role do consumers play in resource allocation through relative prices?
Consumer preferences, reflected in their willingness to pay, influence demand and guide firms in deciding what to produce.
How do relative prices contribute to economic efficiency?
They help ensure that resources are used where they create the most value, minimizing waste and maximizing output.
how does relative price influence the three basic economic questions
What to produce?
Producers respond to changes in relative prices by allocating resources toward goods and services that are more profitable.
If the relative price of a good increases due to high demand, more firms will produce it.
How to produce?
Businesses choose production methods based on the relative prices of inputs (e.g., labor vs. capital).
If labor costs rise relative to machinery, firms may invest in automation instead of hiring more workers.
For whom to produce?
Goods and services are distributed based on consumers’ willingness and ability to pay.
Higher relative prices may make a product accessible only to those who can afford it, influencing income distribution
