1.8.1 How markets and prices allocate resources

• What does supply refer to in the market mechanism?

  Producers' willingness to offer goods
• Resources flow to sectors where prices are higher in the market mechanism

  True
• Prices communicate information about the relative scarcity and demand
• What is the equilibrium price in the market mechanism?

  Supply equals demand
• What is the incentive role of prices in the market mechanism?

  Motivates producers to adjust supply
• At market equilibrium, the quantity demanded equals the quantity supplied
• Higher prices encourage increased production, while lower prices discourage it


  True
• The market mechanism determines the prices and quantities of goods and services
• Match the aspect with its explanation:

  Supply ↔️ Producers' willingness to offer goods at a price

  Demand ↔️ Consumers' willingness to buy goods at a price

  Price ↔️ Determined by supply and demand intersection
• Resources flow to sectors where prices are higher
• Market equilibrium occurs where demand equals supply
• Resources are allocated through price signals to improve efficiency
• Command economies aim for equitable distribution but may lack efficiency compared to market allocation.

  True
• The market mechanism facilitates the allocation of resources based on the preferences and needs of consumers and producers
• The price in the market mechanism is determined by the intersection of supply and demand
• What are the three key roles of prices in the market mechanism?

  Information, incentives, rationing
• Prices ration resources to those who value them most and are willing to pay the market price

  True
• When demand for organic vegetables increases, the equilibrium price rises
• High prices indicate strong demand and scarce supply in the market


  True
• What are price signals in the market mechanism?

  Information conveyed by prices
• Resources flow to sectors where prices are higher, improving efficiency
• The market mechanism allocates resources based on consumer preferences and producer needs.


  True
• Prices in the market mechanism are determined by the intersection of supply and demand curves.


  True
• Match the function of prices with its explanation:

  Communication ↔️ Signals market conditions through price levels

  Incentives ↔️ Motivate behavior by increasing profitability

  Rationing ↔️ Allocates goods to those willing to pay
• Steps of how price signals guide resource allocation:

  1️⃣ Higher prices encourage production

  2️⃣ Resources flow to high-demand sectors

  3️⃣ Consumers are informed about product values
• Match the advantage of market allocation with its corresponding disadvantage:

  Responsiveness to Consumer Demand ↔️ Potential for Inequality

  Incentives for Efficiency ↔️ Market Failure

  Competition Fosters Innovation ↔️ None
• Market allocation requires government intervention to mitigate inequality and correct market failures