Understanding the Price Mechanism

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

• To eliminate market competition

• To centralize decision-making

• To determine the allocation of resources

• To ensure equitable distribution of resources

Which function of the price mechanism involves prices adjusting to show where resources are needed?

• Incentive function

• Signalling function

• Equilibrium function

• Rationing function

What happens when there is a rise in market price according to the price mechanism?

• Consumers are encouraged to buy more of the product

• The government intervenes to control prices

• Producers are encouraged to switch into making that good

• Producers are discouraged from making the good

In a free-market system, how is decision-making characterized?

• Regulated by a single body

• Centralized

• Decentralized

• State-controlled

What is a consequence of a fall in price in the market?

• An increase in supply

• A decrease in demand

• A rise in production costs

• An extension of demand

Which economic system is characterized by significant intervention in market prices?

• Traditional economy

• Free-market system

• Mixed economy

• Planned economic system

What is a signal to suppliers to expand production?

• Decreasing production costs

• Government subsidies

• High demand from consumers

• Excess supply in the market

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

• Subsidizing

• Incentivising

• Signalling

• Rationing

What happens to prices when resources become particularly scarce?

• Prices decrease

• Prices fluctuate randomly

• Prices remain constant

• Prices increase

What motivates a producer to increase production according to the incentivising function?

• Government intervention

• Potential for higher revenue

• Increased costs

• Decreased demand