8.1 How Markets And Prices Allocate Resources Flashcards
What is the signalling function of prices?
Prices provides information to the sellers and buyers
What are the 4 functions or prices in an economy?
-signalling function
-the incentive function
-the rationing function
-the allocative function
Give an example of the signalling function of Prices?
Prices of strawberries displayed in a market
What is the incentive function of prices?
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
What is the rationing function of prices?
Rising prices ration demand for a product
What creates incentives for people to alter their economic behaviour in a shop?
The information signalled by relative prices e.g price of strawberries and raspberries
Why does higher price in the market create incentives for producers to supply more of a good or service .
Because they believe larger profits can be made
What does the graph for the incentive and rationing function of prices look like?
Axis: x-quantity, -price
How is incentive function of a price rise shown in the graph (incentive and rationing functions of prices)(2 asp)
- Extension of supply along the market supply curve, depicted in the upwards arrow in the diagram of S
- Falling prices reduce profits
How does the incentive function of prices work in the labour market?
Rising wages creates incentives for people to acquire skills and supply their labour services (falling wages reduce these incentives)
How does the graph show the rationing functions of prices?
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
When does contraction along a demand curve exist until
Excess demand is completely eliminated
What is the allocative function of prices?
Changing relative prices allocate scarce resources away from markets exhibiting excess supply into markets in which there is excess demand
What is the difference between the allocative function of prices and the rationing function of prices?
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
in a pure market economy who allocates scarce resources between competimg uses?
the prices and markets alone
in a mixed economy,how are scarce resources allocated?
markets are usually dominant pver price
What are the advantages of the price mechanism?(3 asp)
-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
What are the disadvantages of the price mechanism?(4 asp)
( 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
What is consumer sovereignty?
the situation in an economy where the desires and needs of consumers control the output of producers.
What do pro-free market economists believe about the price mechanism?
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
What do interventionist economists believe about the price mechanism?
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
What are planning mechanisms?
governance structures that are used to manage local land use development. and community decision-making
