The role of markets in allocating resources
Markets and the price mechanism
- microeconomics = single parts of the economy; macroeconomics = the whole economy.
- A market is any place or system where buyers and sellers trade (it can be online).
- In a free market the price mechanism allocates resources — prices decide what is made, how, and for whom.
Practice
A market is:
A market is wherever buyers and sellers meet to trade — including online.
Practice
Studying one industry or product is part of:
Micro studies single parts; macro studies the whole economy.
The three jobs of price
- signalling — a price change tells buyers and sellers what's happening (rising → "make more").
- incentive — a higher price gives firms a reason to produce more.
- rationing — when a good is scarce, the high price shares it among those willing to pay.
Practice
Match each job of the price mechanism.
Prices signal, incentivise and ration in a free market.
You've got it
Key idea
- micro = parts; macro = the whole economy; a market is where buyers and sellers trade
- the price mechanism allocates resources (what/how/for whom)
- price does three jobs: signalling, incentive, rationing