Paper 3 · November 2007 · Opportunity Cost and Scarcity
In a free market economy, resources are primarily allocated through which of the following?
AFixed prices negotiated annually between producers and consumer representatives
BEqual allocation of resources to every firm regardless of consumer demand
CThe price mechanism, in which prices adjust to balance demand and supply
DCentral government directives that set production quotas for each industry
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