Paper 3 · Resource allocation and market economies
In a free market economy, resources are primarily allocated through which of the following?
AThe price mechanism, in which prices adjust to balance demand and supply
BCentral government directives that set production quotas for each industry
CFixed prices negotiated annually between producers and consumer representatives
DEqual allocation of resources to every firm regardless of consumer demand
Explanation: In a free market, prices act as signals: when demand exceeds supply, prices rise, prompting producers to supply more and consumers to demand less until the market clears; when supply exceeds demand, prices fall until equilibrium is restored. This price mechanism, not central planning, is what allocates resources.
Derived from ZIMSEC Economics Paper 3, November 2007, Q1
