How do markets provide for an efficient allocation of scarce resources?
What will be an ideal response?
The market prices of the various products, as determined by the market forces, provide incentives that implicitly allocate economic resources. The market allows the optimizing buyers and sellers to freely negotiate the prices of various goods and services. For example, in the market for apartments, optimizing landlords and optimizing renters can freely negotiate the rental price of an apartment. These market prices then provide incentives that allow for efficient allocation of scarce resources. This allocation mechanism implies, for example, that mostly highly-paid workers—and others with a high opportunity cost of time—tend to rent the apartments with the best locations.
You might also like to view...
The ability of a firm to charge a price greater than marginal cost is called
A) market power. B) monopoly power. C) price-making power. D) cost-plus pricing.
Consider estimating a consumption function from a large cross-section sample of households. Assume that households at lower income levels do not have as much discretion for consumption variation as households with high income levels
After all, if you live below the poverty line, then almost all of your income is spent on necessities, and there is little room to save. On the other hand, if your annual income was $1 million, you could save quite a bit if you were a frugal person, or spend it all, if you prefer. Sketch what the scatterplot between consumption and income would look like in such a situation. What functional form do you think could approximate the conditional variance var(ui Inome)? What will be an ideal response?