Chapter 6 - The Role of Markets in Allocating Resources

Question 1

Define the market system.

Answer 1

The market system refers to the method of allocating scarce resources through the market forces of demand and supply.

Question 2

Define market equilibrium.

Answer 2

Market equilibrium exists when the demand for a product matches the supply, so there is no excess demand (shortage) or excess supply (surplus).

Question 3

Define market disequilibrium.

Answer 3

Market disequilibrium exists if the price for a product is too high (resulting in excess supply, or surplus) or too low (resulting in excess demand, or a shortage).

Question 4

Define the price mechanism.

Answer 4

The price mechanism refers to the system of relying on the market forces of demand and supply to allocate resources.

Question 5

What are the 3 key economic questions about determining resource allocation?

Answer 5

1, What production should take place?
2. How should production take place?
3. For whom should production take place?

Question 6

What are the features of the price mechanism?

Answer 6

• There is no government interference in economic activities.
• Goods and services are allocated on the basis of price.
• The allocation of factor resources is based on financial activities.
• Competition creates choices and opportunities for firms and private individuals.