3.8.1 - How Markets and Prices Allocate Resources Flashcards

1
Q

What are the precise functions that prices perform?

A

Signalling
Incentive
Rationing
Allocative

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2
Q

What is the signalling function of prices?

A

Prices provide information to buyers and sellers.

They adjust to reflect scarcities and surpluses.

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3
Q

Give an example of the signalling function of prices?

A

The prices of graphics cards rising providing information to Nvidia to increase production.

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4
Q

What is the incentive function of prices?

A

Prices create a reason for people to alter their economic behaviour.

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5
Q

What is an example of the incentive function?

A

A higher price provides incentive for people to alter their economic behaviour.

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6
Q

What is the rationing function of prices?

A

Increasing the price to reduce demand for a product.

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7
Q

Draw a graph demonstrating the incentive and rationing functions of prices.

A
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8
Q

What is an example of rationing and incentive functions?

A

Due to rising wages in a labour market, the demand for labour of a firm is rationed.

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9
Q

What is the allocative function of prices?

A

Changing relative prices allocate scarce resources away from markets with excess supply to those with excess demand.

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10
Q

What is the relationship between the rationing function of prices and allocative function of prices?

A

The allocative function of prices moves resources between markets, the rationing function of prices moves resources within markets to those who wants them the most.

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11
Q

How do prices coordinate the decision making of buyers and sellers?

A

Incentive function of prices
Rationing and allocative function of prices

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12
Q

What are the advantages of the price mechanism? (in competitive markets)

A
  • Promotes consumer sovereignty
  • Productively efficient allocation of resources
  • Allocatively efficient allocation of resources
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13
Q

How is consumer sovereignty a benefit of the price mechanism?

A

Goods and services are produced only if consumers ‘vote’ for them by spending on them.

Firms / industries that produce goods that consumers do not wish to buy, do not survive in these markets.

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14
Q

How is a productively efficient allocation of resources a benefit of the price mechanism?

A

As the market is highly competitive, costs are reduced to prevent firms from going out of business.

These cost savings can then be transferred onto consumers.

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15
Q

How is allocative efficiency a benefit of the price mechanism?

A

Producers supply only what society demands, so there is no over-consumption or under-consumption.

(It is impossible to measure exactly what society demands though)

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16
Q

What are the disadvantages of the price mechanism? (in imperfectly competitive markets)

A
  • Asymmetric market information and market power, promoting producer sovereignty
  • Manipulation of consumer wants through marketing such as persuasive marketing
  • Price mechanism is ‘value-neutral’
17
Q

Why is the asymmetric market information a disadvantage of the price mechanism?

A

Firms are able to exploit their producer sovereignty so goods and services available for consumers are determined by firms rather than consumers.

18
Q

Why is the manipulation of consumer wants a negative of the price mechanism?

A

Large imperfectly competitive firms will be able to manipulate consumer wants through persuasive advertising making the producer sovereign rather than the consumer.

19
Q

Why is the price mechanism being ‘value neutral’ a disadvantage of the price mechanism?

A

There is no regard for equality and the allocation of buying power between different incmoe groups.

This leads to numerous market failures.

20
Q

What is the case for extending the operation of the price mechanism?

A

Free marketeers believe that the price mechanism works well and gov. intervention works badly.

The risk of gov. failure produces an outcome worse than market failure, so the price mechanism should be extended into areas of the economy that were previously dominated by the state provision of goods.

21
Q

What is the case for extending the operation of the price mechanism?

A

Free marketeers believe that the price mechanism works well and gov. intervention works badly.

The risk of gov. failure produces an outcome worse than market failure, so the price mechanism should be extended into areas of the economy that were previously dominated by the state provision of goods.

22
Q

What is the case against extending the operation of the price mechanism?

A

Interventionists believe that markets often perform badly and gov. intervention can improve this operation.