The Role Of Markets In Allocating Resources

Question 1

What is the Market System?

Answer 1

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

Question 2

What is Price Mechanism?

Answer 2

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

Question 3

What does the price mechanism establish?

Answer 3

The price mechanism establishes the market equilibrium where demand equals supply. This is also know
as the market system.

Question 4

What are the key features of price mechanism?

Answer 4

1
There is no government interference in economic activities.
Resources are owned by private economic agents who have the economic freedom to allocate scarce resources without interference by Government.
2
Goods and services are allocated based on price. A high price encourages more supply, whereas a low price encourages consumer spending. Goods and services are sold to those who have the willingness and ability to pay.
3
The allocation of factor resources is based on financial incentives. For example, agricultural land is used for harvesting crops with the greatest financial return, while unprofitable products are no longer produced.
4
Competition creates choice and opportunities for firms and private individuals. Consumers can thus benefit from a variety of innovative products, at competitive prices and of high quality.