Understanding the Price Mechanism

What is the primary role of the price mechanism in a free market economy?

• To increase taxes

• To allocate resources

• To control government policies

• To regulate monopolies

Which of the following is NOT a function of prices in a market economy?

• Incentivising

• Signalling

• Subsidizing

• Rationing

What happens to prices when resources become particularly scarce?

• Prices rise

• Prices remain the same

• Prices fluctuate randomly

• Prices decrease

In the signalling function of prices, what might producers do if prices rise?

• Exit the market

• Ignore the price change

• Enter the market

• Decrease production

According to the law of demand, what do consumers do when prices rise?

• Demand remains constant

• Demand more

• Demand less

• Demand fluctuates

What is the effect of the incentivising function of prices on producers?

• Producers exit the market

• Producers increase production

• Producers decrease production

• Producers maintain production levels

What does a short-term increase in demand create according to the price mechanism?

• Market equilibrium

• Excess demand

• Excess supply

• Price stability

What is the result of the signalling function when demand increases?

• A decrease in supply

• A new equilibrium at a higher price level

• A lower price level

• A decrease in demand

What is the role of prices in the rationing function?

• To increase demand

• To decrease supply

• To ration off excess demand

• To create excess supply

What is the likely action of producers when they receive a signal of higher prices?

• Reduce their stock of capital goods

• Ignore the market signals

• Expand their stock of capital goods

• Decrease their market presence