Scribd
Upload
813 views1 page

Market Systems & Price Mechanism

The price mechanism refers to relying on supply and demand to determine what, how, and for whom goods and services are produced. Key features include that there is no government interference in the economy, goods are allocated based on price, and resources go to their highest valued uses as determined by financial incentives. Competition creates choices for consumers and firms. Not a feature is that rules and regulations are imposed to correct market failures.

Uploaded by

Ahmed Danaf
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
813 views1 page

Market Systems & Price Mechanism

The price mechanism refers to relying on supply and demand to determine what, how, and for whom goods and services are produced. Key features include that there is no government interference in the economy, goods are allocated based on price, and resources go to their highest valued uses as determined by financial incentives. Competition creates choices for consumers and firms. Not a feature is that rules and regulations are imposed to correct market failures.

Uploaded by

Ahmed Danaf
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 1

6 THE ROLE OF MARKETS IN ALLOCATING RESOURCES

In a market system, the decision about what, how and for whom production
should take place is determined by the forces of demand and supply. See
Chapter 13 for more details on this.

Exam-style question
Which option is not a key economic question that is addressed by the
market economy? [1]
A For whom should production take place?
B How should production take place?
C Why should production take place?
D What production should take place?

Exam-style question
With the use of a relevant example, explain how prices are determined in a
market system. [4]

Introduction to the price mechanism


Definition The price mechanism refers to the system of relying on the market forces of
demand and supply to allocate resources. In this system, the private sector (see
The price mechanism
refers to the system of Chapter 13) decides on the fundamental questions of what, how and for whom
relying on the market production should take place. For example, wage rates are determined by the
forces of demand and forces of demand for labour (by private sector firms) and supply of labour (by
supply to allocate workers who offer their labour services).
resources. Features of the price mechanism include the following:
» There is no government interference in economic activities. Resources are
Study tip owned by private economic agents who have the economic freedom to allocate
To better understand scarce resources without interference from the government.
the concept of the price
» Goods and services are allocated on the basis of price — a high price encourages
mechanism, refer to
Chapters 7 and 8 on more supply whereas a low price encourages consumer spending. Goods and
demand and supply. services are sold to those who have the willingness and ability to pay.
» The allocation of factor resources is based on financial incentives — for
example, agricultural land is used for harvesting crops with the greatest
financial return, while unprofitable products are no longer produced.
» Competition creates choice and opportunities for firms and private individuals.
Consumers can thus benefit from a variety of innovative products, at
competitive prices and of high quality.

Exam-style question
Which option is not a feature of the price mechanism? [1]
A Competition creates choice and opportunities for firms and private individuals.
B Goods and services are allocated on the basis of price.
C Resources are owned by private economic agents who have the economic
freedom to allocate scarce resources.
D Rules and regulations are imposed to correct market failures, such as the
overconsumption of demerit goods.
26

You might also like