Unit 2 - S&D model - part 2 - 一些答题套路

Question 1

functions of prices

Answer 1

1. It acts as an incentive to firms —
   higher prices allow firms to produce more goods/services and encourage increased production and sales by providing higher profits.
2. It acts as a signalling device —
   changes in price show changes in supply and/or demand and act as a signal to producers and consumers. For example, a price increase is a signal to producers that demand is high, so this will encourage them to increase production.
   It allows the transmission of preferences.
3. It acts to ration scarce resources —
   if there’s high demand for a good/service and its supply is limited, then the price will be high. Supply of the good will be restricted to those that can afford to pay a high price. The opposite applies for goods that are in low demand but in high supply — they’ll have a low price and many will be sold

Question 2

how price helps to allocate resources / solve the basic economic problem / solve the problem of scarcity:

Answer 2

(下划线是价格的三个功能；加粗的是怎么解决basic econ problem）

The price mechanism refers to the system of relying on the market forces of demand and supply to allocate resources. It serves as a signalling device , an incentive to firms and it acts to ration scarce resources.

FOR EXAMPLE, when there is an increase in demand, there would be an excess demand at the old market price. As a result, the market price will go up, so that market supply and market demand will adjust accordingly.

During this process, the higher market price is a signal to producers, transmistting consumers’ preference to producers so that producers know that there is an excess demand.

1. Being motivated by the profit motives, the producers will be encouraged to produce more 【what to produce】.
2. In order to maximise profits, products will produce the goods in the most efficient way and at the lowest possible cost 【how to produce】.
3. As a resulat, more resources are being allocated to the production of this goods 【what to produce】. Furthermore, the goods are bought by consumers who are able to afford the products 【for whom to produce】

Question 3

price mechanism的好处坏处

Answer 3

其实就是market economy 的好坏