Price Mechanism

Question 1

Price Mechanism

Answer 1

The system where prices are determined by demand and supply in competitive markets, resulting from the free interaction of buyers and sellers
(these interactions determine allocations of resources)

Question 2

Signalling

Answer 2

In the event of asymmetric information this is a method used by the seller when the seller has more information, which attempts to convince the buyer that the product is of a good quality

Question 3

Prices as incentives

Answer 3

(price provides motivation for decision makers to respond to the information)

Question 3

Prices as signals

Answer 3

(price communicates information to decision makers)

Question 3

Producer surplus

Answer 3

Refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good

This is shown as the area above the firms’ supply curve and below the price received by the firm, up to the quantity produced.

Question 3

Allocative efficiency

Answer 3

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers

Marginal Social benefit = Marginal Social Cost

Question 4

Marginal Benefit

Answer 4

The extra or additional benefit received from consuming one kore unit of a good

Question 4

Consumer surplus

Answer 4

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid

This is shown as the area under the demand curve and below the price paid by the consumer, up to the quantity purchased

Question 5

Social surplus (a.k.a. community surplus)

Answer 5

The sum of consumers and producer surplus; it is maximum in a competitive market with no market failures

Question 6

What theory does price mechanism relate to

Answer 6

Adam Smiths invisible hand theory

proposed that the market can coordinate any decisions of countless actions of individual economic decision makers without any central authority just through only demand and supply.

Question 7

Marginal Benefit

Answer 7

The extra benefit that you get from each additional unit of something you buy

Marginal benefit decreases as the quantity of a good consumed increases = demand

Question 8

Marginal Cost

Answer 8

The extra or additional cost of producing one more unit of output

Marginal cost increases as the quantity of a good produced increases