Price And allocaltion Of Resources Flashcards
(11 cards)
When do competitive markets exist?
Large amount of consumers and producers
No single consumer or producer can influence allocation of resources
What is assumed in a competitive market?
Consumers aim to maximise welfare
Producers compete to provide consumers with what they want at the lowest possible price
What is price?
The value at which good or serivce is exchanged
What is a price mechanism?
Changes in the demand or supply of a good/service lead to changes in its price and quantity.
How does the price mechanism allocates goods/services?
Uses the invisible hand to move supply/demand towards equilibrium
What price mechanisms are there?
Incentive function
Signalling function
Rationing function
What is the incentive function?
The level of price either incentives or disincentives for selling goods/services
What is the signalling function?
Changes in prices signal to consumers and producers changes in supply and demand.
What is the rationing function?
Supply/Demand can be restricted
What are the advantages of the price mechanism?
Prices will kept to a minimum
Resources will be distributed efficiently
What are the disadvantages of the price mechanism?
Inequality
Underprovision of merit and overprovision of demerit goods
Public goods won’t be produced
