3.8.1 How markets and prices allocate resources

• What is the term for the point where demand equals supply?

  Market equilibrium
• The price mechanism is a key feature of the market mechanism.
• Demand is the quantity of goods or services consumers are willing and able to purchase at different prices.


  True
• Market equilibrium is the point where demand equals supply.
• If demand for strawberries increases while supply remains constant, the price will rise.


  True
• What happens to organic food prices if consumer preferences shift towards it?

  Prices rise
• When prices rise due to scarcity, consumers are encouraged to reduce consumption.
• The price mechanism allocates resources based on consumers' willingness to pay.


  True
• What is the equilibrium price in a market?

  Price where demand equals supply
• What is the term for the point where demand equals supply in a market?

  Market equilibrium
• What happens to the price of electric cars if demand increases and supply remains constant?

  Price rises
• In competitive markets, prices allocate resources based on supply and demand
• Consumers express their preferences through demand in the market mechanism.

  True
• What happens to the production of electric cars when demand increases, illustrating resource allocation in action?

  More resources allocated
• Allocative efficiency ensures resources produce goods consumers want
• What are two types of efficiency in markets?

  Allocative and productive
• What is one benefit of market efficiency?

  Optimal resource use
• What is the primary driver of price changes in a market economy?

  Supply and demand shifts
• What happens to resource allocation when the price of electric cars rises due to increased demand?

  More resources allocated
• The market mechanism refers to the process by which supply and demand interact to determine prices and allocate resources in an economy.
• What do prices signal in the market?

  Scarcity
• The price mechanism allocates resources based on the willingness to pay of consumers.
• The price mechanism is less efficient than central planning for allocating scarce resources.

  False
• At market equilibrium, the price is known as the equilibrium price.
• What is the condition at the equilibrium price in the market?

  No surplus or shortage
• In competitive markets, prices signal the relative scarcity and value of goods and services.
• Match the allocation method with its signal for scarcity:

  Price Allocation ↔️ Prices rise

  Central Planning ↔️ Bureaucratic decisions

  Rationing ↔️ Quotas are used
• The market mechanism is a decentralized system guided by the price system.
• The invisible hand refers to self-interested actions of buyers and sellers leading to socially optimal outcomes.


  True
• Order the following allocation methods from most to least efficient:

  1️⃣ Market Mechanism

  2️⃣ Central Planning

  3️⃣ Rationing
• What happens to the price of a good when it becomes scarce?

  Price rises
• If demand for electric cars increases and supply remains constant, the price will rise.
• Market equilibrium occurs where demand equals supply
• Market equilibrium results in neither a surplus nor a shortage of goods.


  True
• What happens to the price of organic food as demand increases, incentivizing more farmers to switch to organic farming?

  Price rises
• Match the allocation method with its signal for scarcity:

  Price Allocation ↔️ Prices rise to reflect scarcity

  Central Planning ↔️ Relies on bureaucratic decisions

  Rationing ↔️ Distributes based on quotas
• Producers are motivated by profit to meet consumer demand
• What is the term for the degree to which market prices reflect all available information?

  Market efficiency
• Markets are always efficient due to perfect competition and full information.

  False
• What happens to the price of organic vegetables in an efficient market when demand increases?

  Price reflects higher costs