Section 2-Competitve Markets

Question 1

Price and the allocation of resources:

When do competitive markets exist?

Answer 1

• When there are a large number of consumers and producers
• When no single consumer or producer can influence the allocation of resources by the market, or the price that good and services can be bought at.

Question 2

Price and the allocation of resources:

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 customers

Question 3

What is price mechanism ?

Answer 3

-Forces of supply and demand

Question 4

Three functions of price mechanism?

Answer 4

• Acts as an incentive to firms, (higher prices allow firms to produce more goods/services
• Acts as a signalling device (changes in price show changes in supply and demand )
• It acts to ration scarce resources( if there is a high demand for a good/service and its supply is limited , then the price will be high)

Question 5

What is price mechanism also used for ?

Answer 5

-Also used to allocate the scarce resources used to produce goods/services

Question 6

Advantages of price mechanism?

Answer 6

-Resources will be allocated efficiently to satisfy consumers needs and wants