8.1 How Markets And Prices Allocate Resources

Question 1

What is the signalling function of prices?

Answer 1

Prices provides information to the sellers and buyers

Question 2

What are the 4 functions or prices in an economy?

Answer 2

-signalling function
-the incentive function
-the rationing function
-the allocative function

Question 3

Give an example of the signalling function of Prices?

Answer 3

Prices of strawberries displayed in a market

Question 4

What is the incentive function of prices?

Answer 4

Prices create incentives for people to alter their economic behaviour e,g higher price creates more incentive for firms to supply more of a good or service

Question 5

What is the rationing function of prices?

Answer 5

Rising prices ration demand for a product

Question 6

What creates incentives for people to alter their economic behaviour in a shop?

Answer 6

The information signalled by relative prices e.g price of strawberries and raspberries

Question 7

Why does higher price in the market create incentives for producers to supply more of a good or service .

Answer 7

Because they believe larger profits can be made

Question 8

What does the graph for the incentive and rationing function of prices look like?

Answer 8

Axis: x-quantity, -price

Question 9

How is incentive function of a price rise shown in the graph (incentive and rationing functions of prices)(2 asp)

Answer 9

1. Extension of supply along the market supply curve, depicted in the upwards arrow in the diagram of S
2. Falling prices reduce profits

Question 10

How does the incentive function of prices work in the labour market?

Answer 10

Rising wages creates incentives for people to acquire skills and supply their labour services (falling wages reduce these incentives)

Question 11

How does the graph show the rationing functions of prices?

Answer 11

At p1 price increases to get rid of excess demand. This rations demand for the good

Rationing function is depicted by the contraction of demand of D

Question 12

When does contraction along a demand curve exist until

Answer 12

Excess demand is completely eliminated

Question 13

What is the allocative function of prices?

Answer 13

Changing relative prices allocate scarce resources away from markets exhibiting excess supply into markets in which there is excess demand

Question 14

What is the difference between the allocative function of prices and the rationing function of prices?

Answer 14

Rationing function:distributes scarce resources to consumers who value them most highly

Allocative function:directs resources between markets away from markets with excess supply to markets with excess demand

Question 15

in a pure market economy who allocates scarce resources between competimg uses?

Answer 15

the prices and markets alone

Question 16

in a mixed economy,how are scarce resources allocated?

Answer 16

markets are usually dominant pver price

Question 17

What are the advantages of the price mechanism?(3 asp)

Answer 17

-promotes consumer sovereignty (only goods that consumers are prepared to pay for are produced)

-the price mechanism leads to a productively efficient allocation of resources

-by redistribution of resources into the production of goods and services that people wish to buys the price mechanism achieves an allocatively efficient outcome

Question 18

What are the disadvantages of the price mechanism?(4 asp)

Answer 18

( mainly in imperfectly competitive markets)

due to asymmetric information in imperfectly competitive markets, it leads to outcomes where monopolies exploit consumer sovereignty

-goods and services determined by firms not consumers in a monopoly

-highly imperfectly competitive firms possess sufficient market power to influence consumer wants through marketing and advertising

-price mechanism is very neutral and has no regard for equity and fairness-can lead to market failure

Question 19

What is consumer sovereignty?

Answer 19

the situation in an economy where the desires and needs of consumers control the output of producers.

Question 20

What do pro-free market economists believe about the price mechanism?

Answer 20

Works well and government intervention in the economy works badly
-risk of government failure

-they believe the price mechanism should be extended into parts of the economy previously dominated by state provision of goods and services

Question 21

What do interventionist economists believe about the price mechanism?

Answer 21

Markets perform badly with the price mechanism and that government intervention and the planning mechanism can improve on the free operation of the market mechanism

Question 22

What are planning mechanisms?

Answer 22

governance structures that are used to manage local land use development. and community decision-making