IB Economics Topic 2.3.3 Functions of the Price Mechanism Revision Notes (SL/HL)

IB Economics Topic 2.3.3 Functions of the Price Mechanism Revision Notes (SL/HL) | RevisionDojo

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When markets operate competitively, the demand and supply determine the equilibrium price and quantity.
This system in which the interactions of consumers and producers determine the prices through forces of demand and supply is referred to as the price mechanism.

The price mechanism is responsible for two functions in an economy:

Resource allocation: assigning the factors of production to specific economic activities to efficiently produce goods and services.
Rationing: the controlled distribution of the scarce resources, goods, and services.

Resource allocation

Definition

Resource allocation

Assigning available resources or factors of production to particular uses selected from various possible options.

The price mechanism affects the resource allocation within industries and countries:

Producers sell only the goods (or services) and quantity of the goods that consumers are willing and able to buy.
Consumers buy only the goods (or services) and quantity of the goods that the producers are willing and able to supply.

This equality in the buying and selling choices allocates resources and determines what is being produced and how much:

Firms will only use the resources that consumers are willing and able to pay for.
Through this mechanism, a free market economy answer the question what to produce? (and how much).

In a nutshell, prices function as signals and incentives that determine the resource allocation.

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Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Duis aute irure dolor in reprehenderit

Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum.

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, consectetur, adipisci velit.

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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When markets operate competitively, the demand and supply determine the equilibrium price and quantity.
This system in which the interactions of consumers and producers determine the prices through forces of demand and supply is referred to as the price mechanism.

The price mechanism is responsible for two functions in an economy:

Resource allocation: assigning the factors of production to specific economic activities to efficiently produce goods and services.
Rationing: the controlled distribution of the scarce resources, goods, and services.

Resource allocation

Definition

Resource allocation

Assigning available resources or factors of production to particular uses selected from various possible options.

The price mechanism affects the resource allocation within industries and countries:

Producers sell only the goods (or services) and quantity of the goods that consumers are willing and able to buy.
Consumers buy only the goods (or services) and quantity of the goods that the producers are willing and able to supply.

This equality in the buying and selling choices allocates resources and determines what is being produced and how much:

Firms will only use the resources that consumers are willing and able to pay for.
Through this mechanism, a free market economy answer the question what to produce? (and how much).

In a nutshell, prices function as signals and incentives that determine the resource allocation.

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.3.3 Functions of the Price Mechanism Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Resource allocation

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

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Resource allocation

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account