Solved: Explain how the pricing mechanism reallocates resources when there is an increase... [IB Economics]

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Demand: Various quantities of a good or service that consumers are willing and able to buy at different possible prices during a particular time period, ceteris paribus.
Resource Allocation: Assigning available resources or factors of production to particular uses selected from various possible options.

Initial demand (D1) and supply (S) curves intersecting at equilibrium price (P1) and quantity (Q1).
A rightward shift of the demand curve from D1 to D2, indicating an increase in demand.
New equilibrium is at a higher price (P2) and higher quantity (Q2).

Begin by describing the initial equilibrium where the quantity demanded equals the quantity supplied at price P1 and quantity Q1.
Explain that an increase in demand for a product or service shifts the demand curve to the right (from D1 to D2).
This shift indicates that at the original price (P1), the quantity demanded now exceeds the quantity supplied, creating a shortage.
The shortage puts upward pressure on the price, causing it to rise from P1 to P2.
As the price increases, the quantity supplied by producers rises (movement along the supply curve), while the quantity demanded by consumers decreases until a new equilibrium is reached at P2 and Q2.
The higher price signals producers to allocate more resources towards the production of the good or service, as it becomes more profitable.
This reallocation of resources results in an increase in the quantity supplied, moving the market towards the new equilibrium.
The pricing mechanism ensures that resources are allocated efficiently, as they are directed towards goods and services that are in higher demand.
This process reflects consumer preferences, as resources are reallocated to produce more of what consumers are willing to pay for at higher prices.

Answers may include:

Choice Architecture: The way in which options are showcased to decision-makers where there is emphasis on the design and environment to influence decisions.
Merit Goods: Merit goods are goods that are desirable by the society but are under provided by the market.
Nudge: A method used to influence the decision of a consumer in a desirable way, without offering any financial incentives or imposing any legal regulations over them.

A supply and demand diagram showing the under-consumption of merit goods and how choice architecture can shift the demand curve to the right.
The initial demand curve (D1) shows under-consumption at equilibrium price P1 and quantity Q1. The new demand curve (D2) after implementing choice architecture shows increased consumption at a higher quantity Q2.

The question requires an evaluation of how choice architecture can effectively increase the consumption of merit goods using real-world examples.
Merit goods like education and healthcare are often under-consumed due to information failure or lack of awareness.
Nudges: Use of default options, framing effects, and simplification to encourage consumption.
The initial demand curve (D1) represents the under-consumption of merit goods.
Implementation of choice architecture shifts the demand curve to the right (D2), indicating increased consumption.
Simplified information and default options can lead to higher consumption of merit goods.
Nudges can effectively alter consumer behavior without restricting freedom of choice.
Manipulating choices may raise ethical questions about consumer autonomy.
Choice architecture alone may not address deeper issues like affordability or access.

Economics International Baccalaureate (IB) Practice Question: 1. Explain how the pricing mechanism reallocates resources when there is an increase in demand for a product or service....