3.1.2.1 How resources are allocated in a market economy

• What are the three main methods of resource allocation?

  Market-based, command-based, tradition-based
• In a command-based economy, resources are allocated by central planning and directives
• What coordinates supply and demand in a market economy to allocate resources?

  The price mechanism
• The interaction of supply and demand determines the equilibrium price in a market economy.

  True
• Price signals guide producers to adjust their supply
• The price mechanism efficiently allocates resources by responding to changing market conditions.

  True
• How does an increase in demand affect the equilibrium price and quantity?

  Price rises, quantity rises
• The price mechanism ensures resources flow to their most valued uses in a market economy.


  True
• In a market economy, resources are allocated through the price mechanism.
• What is the primary determinant of resource allocation in a market-based system?

  Consumer demand
• Resource allocation refers to the process of distributing scarce resources among competing uses and users.
• The interaction of supply and demand determines the equilibrium price.
• Match the scenario with its effect on price and resource allocation:

  Excess Demand ↔️ Price increases, supply increases

  Excess Supply ↔️ Price decreases, supply decreases

  Equilibrium ↔️ Price stabilizes, optimal resource use
• Arrange the following changes in order based on their impact on price and quantity:

  1️⃣ Increase in Demand: Price rises, Quantity rises

  2️⃣ Increase in Supply: Price falls, Quantity rises

  3️⃣ Decrease in Demand: Price falls, Quantity falls
• A shift in the demand curve can be caused by changes in consumer income.
• Resource allocation refers to the process of distributing scarce resources among competing uses and users
• Market-based resource allocation relies on the price mechanism and consumer demand.


  True
• Effective resource allocation is crucial to ensure resources are used efficiently in a market economy.


  True
• Producers supply goods and services based on their costs of production
• What are price signals in a market economy?

  Changes in market prices
• Match the scenario with the correct price and resource allocation outcome:

  Demand exceeds supply ↔️ Price increases, production rises

  Supply exceeds demand ↔️ Price decreases, production falls

  Market equilibrium ↔️ Price stabilizes, optimal allocation achieved
• Market equilibrium is the point where the quantity supplied equals the quantity demanded
• Match the change in supply or demand with its effect on price, quantity, and resource allocation:

  Increase in supply ↔️ Price falls, quantity rises, more resources allocated

  Decrease in demand ↔️ Price falls, quantity falls, fewer resources allocated
• Market-based resource allocation relies on central planning by the government.

  False
• Match the method of resource allocation with its description:

  Command-based ↔️ Central planning and government directives

  Tradition-based ↔️ Cultural norms and historical practices
• What coordinates supply and demand in a market economy to allocate resources?

  The price mechanism
• What do price signals indicate to producers and consumers?

  Relative scarcity or surplus
• At market equilibrium, resources are allocated efficiently because marginal benefit equals marginal cost.
• Market equilibrium occurs when marginal benefit equals marginal cost.


  True
• What happens to the supply curve if the cost of production increases?

  It shifts left
• Price signals guide producers to adjust their supply and consumers to adjust their demand.
• When the supply or demand curve shifts, the price mechanism establishes a new equilibrium.


  True
• Match the type of resource allocation with its characteristic:

  Market-based ↔️ Price mechanism and consumer demand

  Command-based ↔️ Central planning and government directives

  Tradition-based ↔️ Cultural norms and historical practices