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Economics IGCSEPDF 21
118 pagesrevision 46932
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The Three Basic Economic Questions
scarcity
What to produce?
How to produce?
For whom to produce?
MCQs
Q.1. What is the primary function of the price mechanism in a free market economy?
PAST-PAPER Questions
Q. Explain the three fundamental economic questions that an economy must answer,
and briefly describe how the price mechanism answers each one. (6 marks)
ANS-
What to produce?
consumer demand
profit
How to produce?
cost minimization
Theproblemof
(unlimitedwants vs. limited resources) forces all economies to make
fundamentalchoicesabouthowtoallocate their scarce resources. These choices are:
1.
Whichgoodsand services will be made (e.g., more consumer goods or
more capital goods)?
2.
Whichcombination of resources/methods will be used (e.g.,
labour-intensiveorcapital-intensiveproduction)?
3.
Whogetsto consume the goods and services produced (how the
output is distributed)?
In a pure market economic system, resources are allocated by the forces of demand and
supply through the price mechanism.
Market is any set of arrangement that brings together all the producers and consumers of a
good or service, so they may engage in exchange. Example: a market for soft drinks.
Goods and services are bought and sold in a market at an equilibrium price where demand and
supply are equal. This is called the price mechanism. It helps answer the three basic economic
questions. Producers will produce the good that consumers demand the most, it will be
produced in a way that is cost-efficient, and will be produced for those who are willing and able
to buy the product.
•
- Answeredby
andthepursuit of
by firms.
Risingprices (dueto high demand)signal to producerstoallocateresources to those goods.
•
- Answeredby
.Firmschoose the most cost-efficient
production methods (e.g., labour-intensive vs. capital-intensive)based on the relative prices of
the factors of production.
•For whom to produce? - Answered by purchasing power/ability to pay. Goods are
allocated to those consumers who are willing and able to pay the market price.
A. To set a minimum price for all essential goods.
B. To ensure equal distribution of income among all citizens.
C. To provide signals and incentives to consumers and producers to allocate scarce resources.
D. To allow the government to have complete control over what is produced.