| How do Competitive Markets exist? | -Has to have a Large Number of Consumers and Producers [Buyers & Sellers]
-No Single Consumer or Producer can Change the Allocation of Resources by the Market, or the Price Level |
| How do Economic Agents act in a Competitive Market [Consumers & Producers] | -Consumers aim to Maximise their own Welfare - Improving their Quality of Life
-Producers will Compete to Satisfy Consumers Wants at the Lowest Price - Maximise own Profit by selling to Most Consumers |
| What is the Price Mechanism? Make an Example with Curtains - Demand Increaases | -This will Allocate Goods as how an 'Invisible Hand' will do so, until Equilibrium is Reached.
-Free from Human Bias and Opinion, it helps Buyers and Sellers make their own Decisions
-Demand Increases for Curtains means the Market, via the Price Mechanism, will give more Resources and thus more Curtains to Buyers, More Labour & Resources to Producers to make more Curtains. |
| What is the 3 Functions of Price Mechanism | -Incentive
-Signalling
-Rationing |
| Explain how the Incentive Function Happens | -The Price will act Incentivise Firms to make Calls - Higher Prices will call for more Supply as there is an Incentive to Produce More - Higher Profits |
| Explain how the Signalling Device works | -Changes in the Price Level leads to Change in Quantity Supplied & Demanded and therefore Signals Consumers
-Price Increase will Signal Producers that Demand is High, so they will Increase Production. |
| Explain how the Rationing Function works | -If High Demand is paired with Little Supply, then the Price will be Very High. Supply will be Restricted to those who can Afford such Demand.
-If there is Low Demand and Huge Supply, then Price will be put Low so Many can be Sold. |
| What is the Advantages of the Price Mechanism | -Resources will be dished out Efficiently & Satisfy Wants and Need
-Price Mechanism can Operate without Employing People to Regulate [As its the 'Invisible Hand of the Market']
-Consumers will Decide what is Produced, and what isn't
-Price kept to a Minimum as Resources are dished out Efficiently |
| What are the Disadvantages of the Price Mechanism | -Inequality in Wealth and Income most Likely
-An Under-Provision in Merit Goods and Over-Provision of Demerit Goods as Supply and Demand won't be Socially Optimal
-People with Little Skills or Work Ability will get Low Wages or Unemployment
-Public Goods shall not be Produced.
-Unintended Consequences may happen as Factors/Reasoning may be Ignored |
