4.1.8.1 How markets and prices allocate resources Quiz: AQA Economics, Unit 1

The 20 questions

1. Which function of price rations scarce goods among buyers when demand exceeds supply?

   • The incentive function, as a lower price encourages consumers to buy more of the good regardless of their budget constraints.
   • The redistribution function, as the price transfers income from buyers to sellers so that the market is more equal in outcome.
   • The rationing function, as a higher price means fewer buyers are willing and able to purchase the good at that price.
   • The signalling function, as a higher price tells producers that the good is no longer worth making in the economy at all.

2. Which function of price signals to producers that consumers want more of a good?

   • The signalling function, because a rising price indicates that demand has increased relative to supply in the market.
   • The rationing function, because a rising price removes all of the consumers who would otherwise buy the good in the market.
   • The welfare function, because a rising price guarantees that the distribution of goods across households becomes more equal.
   • The incentive function alone, because only a falling price can signal to producers that consumers want more of a good.

3. Which function of price gives producers an incentive to supply more goods?

   • The rationing function, because a higher price discourages all firms from producing any output in the market at all.
   • The equity function, because a higher price transfers resources from firms to consumers so that output is evenly shared.
   • The incentive function, because a higher price raises the potential profit from producing and selling additional units.
   • The signalling function, because a higher price tells consumers that producers will reduce supply in the future period.

4. Which is an advantage of the price mechanism in allocating resources?

   • It guarantees that every household receives an equal share of the goods produced, regardless of the income or wealth they hold.
   • It ensures that all goods are produced at the same level of output, so that no shortages or surpluses ever arise in the market.
   • It requires a central planner to set the quantity of each good, so that producers always know exactly what to make.
   • It coordinates the decisions of many buyers and sellers without central direction, responding quickly to changes in scarcity.

5. Which is a disadvantage of the price mechanism?

   • It prevents any change in the output of goods, because prices are fixed at the level set by the government each year.
   • It requires that all goods be sold at the same price across every market, which removes all variation in the economy.
   • It can allocate goods towards those with the greatest ability to pay, which may leave some needs unmet regardless of how urgent they are.
   • It forces every firm to produce the same quantity of goods, so that there is no competition between producers at all.

6. Why might introducing a market for blood be considered undesirable by some economists?

   • It would cause the price of blood to fall to zero, which would make the supply of blood increase without limit in the economy.
   • It may change the nature of the transaction, so that donation becomes a purchase, which could affect the motives and quality of donors.
   • It would reduce the total number of hospital patients, since markets always lower the demand for healthcare services overall.
   • It would eliminate all shortages of blood, because price rationing always removes the need for donation in every society.

7. A market price is above the equilibrium price. What is the most likely result?

   • An equilibrium, because the price has been set above the level at which buyers and sellers are both satisfied.
   • A surplus, because quantity supplied exceeds quantity demanded at the higher price.
   • A shortage, because quantity demanded exceeds quantity supplied at the higher price in the market.
   • No change in quantity supplied, because producers always adjust only the price and never the quantity they offer.

8. Which best describes the coordinating role of prices in a market economy?

   • Prices ensure that every firm earns the same profit, so that resources move only to the firms with the highest output levels.
   • Prices transmit information about scarcity and preferences, so that buyers and sellers adjust their decisions without a central authority.
   • Prices are set by the government so that the production plans of each firm match the needs of each household in the economy.
   • Prices remain constant over time, so that buyers and sellers can plan decisions with complete certainty about future costs.

9. Which is an argument that the price mechanism is an impersonal method of allocating resources?

   • Prices depend on the personal opinions of managers, so every transaction reflects the individual views of the seller involved.
   • Prices reflect the personal characteristics of each buyer, so the market rewards individuals for their character and reputation.
   • Prices allocate goods by ability to pay, not by personal merit or need, so no individual judgement is applied in the outcome.
   • Prices are set by a committee of consumers, who decide individually which households should receive each good in the market.

10. Extending the price mechanism into a new area of activity is most likely to:

    • Lower the costs of the activity to zero, because markets always remove the costs of production for every participant.
    • Change the nature of the activity, because goods and services previously provided on other grounds may take on a commercial character.
    • Eliminate the need for any government regulation, since prices automatically ensure safety and quality for all users.
    • Leave the nature of the activity unchanged, because prices never affect the motives of those who take part in an activity.

11. Which is the best example of the rationing function of prices in the housing market?

    • A rise in rents in a city centre, which reduces the number of tenants who can afford to rent there when rents increase.
    • A rise in house-building in a city, which signals to landlords that rents will fall as supply expands in the market.
    • A government subsidy on rent for all tenants, which increases the number of households who wish to live in the city.
    • A fall in rents in a rural area, which encourages landlords to build new homes so that rents rise again over time at the time in question.

12. Which statement about the incentive function of prices is correct?

    • Changes in relative prices affect only the distribution of income, and have no effect on what is produced in the economy.
    • Prices create incentives only in the short run, because in the long run all markets return to a single fixed price level.
    • Changes in relative prices change the cost and return of different choices, which influences what, how and for whom goods are produced.
    • Prices create incentives only for consumers, since firms are indifferent to changes in price levels in competitive markets.

13. A market for a good has excess demand at the current price. Which change will restore equilibrium if price is free to adjust?

    • The price falls, increasing quantity demanded and reducing quantity supplied until the two are equal in the market.
    • The price rises, reducing quantity demanded and increasing quantity supplied until the two are equal.
    • The price rises, but quantity supplied falls, so that excess demand grows larger and the market moves further from equilibrium.
    • The price stays the same, while suppliers reduce output until quantity demanded falls to match the quantity supplied.

14. Which best explains why prices are said to allocate resources 'for whom' goods are produced?

    • Prices determine who can afford goods, so the pattern of income and wealth shapes which households receive what is produced.
    • Prices ensure that every household receives the same quantity of every good, regardless of its income or wealth in the economy.
    • Prices decide the number of firms in each industry, so that the choice of production method depends only on firm size.
    • Prices require producers to supply goods to the government first, which then decides how the goods are distributed to households.

15. An evaluation point against extending the price mechanism into public services is that:

    • It always increases the quality of public services, because firms compete to offer the highest standards for all users.
    • It removes all risk of shortage, because the price automatically adjusts to meet demand from every patient in the health service.
    • It proves that public services are inefficient in every case, so they should always be replaced by private provision.
    • It may exclude people who cannot pay, so access to services depends on ability to pay rather than on need.

16. A firm raises its price and sells fewer units of output. Which function of price is most clearly illustrated?

    • The incentive function, because the firm is rewarded with lower profit when it raises the price of its product.
    • The equity function, because the firm is redistributing income from buyers to sellers through the higher price in the market.
    • The rationing function, as fewer buyers are prepared to purchase the good at the higher price the firm has set.
    • The signalling function, because the firm is telling consumers that output has been increased to meet higher demand.

17. Which is a valid reason why price signals can be inaccurate in practice?

    • Prices always reflect the full social cost and benefit of every good, so they never misallocate resources in any market.
    • Prices adjust instantly and perfectly to every change in supply and demand, so there is never a time lag in any market.
    • Prices may not reflect external costs or benefits, so resources can be misallocated even when markets appear to clear.
    • Prices are only affected by government decisions, so market conditions have no influence on the prices observed in the economy.

18. Which is the best evaluation of the claim that the price mechanism is the most efficient way to allocate resources?

    • The claim holds only if markets are competitive and there are no significant market failures, so it depends on the conditions present.
    • The claim is always true, because the price mechanism always produces the outcome preferred by society in every situation.
    • The claim cannot be assessed, because efficiency has no meaning in economics and so cannot be compared between systems.
    • The claim is always false, because markets never allocate resources in any way that generates an efficient outcome at all.

19. Which statement describes the effect of a fall in the price of a good on quantity demanded?

    • Quantity demanded falls, because consumers see a lower price as a signal that the good is of poorer quality than before.
    • Quantity demanded rises only for luxury goods, so the demand for necessities is unaffected by their price in the market.
    • Quantity demanded is unchanged, since price affects only the supply of goods in the market and never the demand for them.
    • Quantity demanded rises, as more consumers are willing and able to buy the good at the lower price.

20. A firm with monopoly power sets the price of a good. Which function of price is most weakened?

    • All functions of price are unaffected, because monopoly power changes only the distribution of income between firms in the market.
    • The incentive function is strengthened, because a monopolist's price always equals marginal cost in every market it serves.
    • The signalling and incentive functions, because the monopolist's price may not reflect the cost or scarcity of competitive supply.
    • The rationing function is strengthened, because a monopolist always sells more units to every buyer at a lower price in the market.

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