2281 · 2.2
The role of markets in allocating resources flashcards
Revision flashcards for Cambridge 2281 The role of markets in allocating resources (syllabus 2.2). Flip, recall, then mark a real past-paper question.
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What is resource allocation?
The decision about how land, labour, capital and enterprise are divided between different products.
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What is the price mechanism?
The interaction of demand and supply that sets prices and so allocates resources between uses.
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What is consumer sovereignty?
The idea that consumers' spending decides what is produced in a market economy.
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What is the signalling function of price?
A change in price tells producers and consumers that a product has become more or less scarce.
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What is the incentive function of price?
Higher prices and profits encourage producers to supply more; lower prices and losses encourage them to supply less.
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What is the rationing function of price?
A rising price limits quantity demanded to the available supply, so the good goes to those willing and able to pay.
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What happens to resources when demand for a product falls?
Price and profit fall, firms cut output or leave, and the workers and capital released move to other industries.
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What is market failure?
A situation in which the market allocates resources inefficiently, for example by ignoring external costs or failing to provide public goods.
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Why may the rationing function be seen as unfair?
Because it allocates goods by ability to pay, so people on low incomes may go without essentials.