Price And The Allocation Of Resources

Question 1

Competitive markets exist under certain conditions

2 things

Answer 1

When there are a large number of buyers and sellers.

When no single consumer or producer (or group of either) can influence the allocation of resources by a market, or the price that goods and services can be bought at.

Question 2

In a competitive market it is assumed that consumers and producers act rationally

Answer 2

Consumers aim to maximise their welfare by buying goods/services to maintain or improve their quality of life.

Producers compete to provide consumers with what they want, at the lowest possible price. So they can maximise their profit by selling to the most consumers.

Question 3

Price is the main way of

Answer 3

Allocating resources in a market economy

Question 4

Price

Answer 4

Is the value at which a good or service is exchanged.

Question 5

Price mechanism

Answer 5

Changes in demand or supply of a good or service lead to changes in its price and to the quantity bought and sold.

Question 6

The price mechanism allocates resources in an

Answer 6

Impersonal way known as the invisible hand of the market.

As prices will change until equilibrium in a market is reached. Free from peoples opinion and biases.

Question 7

The price mechanism also

Answer 7

Coordinates the decisions of buyers and sellers.

Question 8

The price mechanisms 3 functions

Answer 8

Acts as an incentive to firms. Higher prices allows firms to produce more goods services and encourage increased production and sales by providing higher profits.

Acts as a signaling device. Changes in price shows changes in supply and or demand and act as a signal to producers and consumers.

It acts to ration scarce resources. High demand and supply limited price is high. Supply of good restricted to those who can afford. Vice versa.

Question 9

Advantages of price mechanism

Answer 9

Resources allocated efficiently to satisfy consumers wants and needs.

The price mechanism can operate without the cost of employing people to regulate it

Consumers decide what is and isnt produced by producers.

Prices kept to minimum as resources used as efficiently as possible.

Question 10

Disadvantages of price mechanism

Answer 10

Inequality in wealth and income is likely.

Under provision of merit goods and over provision of demerit goods

People with limited skills or ability to work will suffer unemployment or receive very low wages

Public goods wont be produced.

Question 11

You need to remember that

Answer 11

Introducing the price mechanism into an area of human activity can have unintended consequences.