The role of markets in allocating resources — practice questions

Step 1 — Scooters: demand shifts right. At the old price there is excess demand, so the price rises.

Step 2 — Signalling: the higher price tells producers that consumers now value scooters more highly.

Step 3 — Incentive: higher prices raise profits, so existing firms expand and new firms enter. They bid for more labour, components and factory space, and resources flow into scooter production.

Step 4 — Rationing: while supply catches up, the higher price rations the limited stock to the consumers willing to pay most.

Step 5 — Bicycles: demand shifts left. Price and profit fall, producers cut output and some leave the industry. The workers and capital released move towards the scooter industry.

Conclusion: no planner was needed — consumers' spending "votes" changed prices, and prices moved resources from bicycles to scooters.

Step 1 — Equilibrium (a): set Qd = Qs: 800 − 50P = 200 + 50P → 600 = 100P → P = $6. Quantity = 800 − 50(6) = 500 widgets.

Step 2 — New equilibrium (b): 1 000 − 50P = 200 + 50P → 800 = 100P → P = $8. Quantity = 1 000 − 50(8) = 600 widgets.

Step 3 — Reading the signal (c): the rise from $6 to $8 signals that consumers now value widgets more. Higher prices raise profits, which gives producers an incentive to expand output from 500 to 600 — buying more materials and hiring more workers — so resources are reallocated towards widgets.

Check: at P = 8, Qs = 200 + 400 = 600 = Qd. The market clears.