How does a free-market system address the output selection task?
A free-market system decides what should be produced via the "law" of supply and demand. Where there is a shortage, the market mechanism pushes the price upward, thereby encouraging more production and less consumption of the commodity that is in short supply. Where a surplus arises, the same mechanism works in reverse: The price falls, discouraging production and stimulating consumption. Under laissez-faire, the allocation of society's resources among different products depends on consumer preferences and the production costs of the goods demanded. Prices vary so as to bring the quantity of each commodity produced into line with the quantity demanded.
You might also like to view...
Which of the following decrease the deadweight loss from a rent ceiling set below the equilibrium rent? i. lowering the ceiling ii. dedicating more resources to enforcement of the ceiling iii. raising the ceiling
A) i only B) ii only C) iii only D) i and ii E) ii and iii
Would you expect a shift in supply to have a greater effect on equilibrium quantity in the short run or in the long run? Explain your answer.
A. A greater effect on equilibrium quantity in the long run because the longer the time period, the more elastic is the good's demand. B. The same effect on equilibrium quantity in the short run and the long run because when analyzing one good, it is predicted that elasticity does not change. C. A greater effect on equilibrium quantity in the short run because elasticity is higher the shorter the time period. This would lead consumers to adjust their quantity greatly. D. A greater effect on equilibrium quantity in the long run because the longer the time period, the greater the increase in income and thus demand. References