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Question: How does a competitive free market system allocate scarce resources us
Question: How does a competitive free market system allocate scarce resources using prices? When do competitive free market systems fail to allocate scarce resources well, and what are our alternatives in this situation?
Here is a suggested outline for your response:
Explain the need for a way to allocate resourcesScarcity
Three key economic questions that all societies must answer (and how the different economic systems answer the three questions)
Explain Adam Smith’s Invisible Hand (consider the I, Pencil video from Module 1)
Clearly and accurately explain the topic of demand (how demand curves model buyer behavior).Law of demand
Shifts in demand
Clearly and accurately explain the topic of supply (how supply curves model seller behavior).Law of supply
Shifts in supply
Clearly and accurately explain equilibrium.Prices determined by buyer and seller behavior.
Prices acting as information and incentives.
Efficiency of market equilibrium.
What happens in a free market if there is a shortage?Do prices increase or decrease? Why?
Does a planner or government official need to force prices to increase?
What happens in a free market if there is a surplus?Do prices increase or decrease? Why?
Does a planner or government official need to force prices to decrease?
Under what conditions do markets fail to allocate scarce resources efficiently?Define market failure.
Define public goods, externalities, and imperfect competition.
Explain how public goods, externalities, and imperfect competition affect the efficiency of free markets.
Explain the role of government in market failures and government failure.How can governments improve market efficiency caused by market failures?
How are governments limited in their ability to correct market failures?
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