Cambridge IGCSE and O Level Economics
Chapter 6: The role of markets in
allocating resources
Suggested answers to individual and group activities
Group activities
1 a T
he price of a ticket to the final of the football World Cup will be higher. This is because more
people will want to see the World Cup Final. The competition among potential buyers for the
tickets will push up the price.
b The price of gold will be higher. The demand for gold relative to its supply is greater than the
demand for rice relative to its supply.
c The price of the services of a dentist is higher than those of a cleaner. This is because there are
more people capable of working as cleaners than working as dentists.
Individual activities
1 a C
onsumers signal to producers what they want to be produced by the amount they are willing
and able to pay for different products.
b Those producers who use the lowest cost method of production to produce the highestquality products will do well, while those who use a higher cost method of production and/or
produce low-quality products are likely to go out of business.
c Those consumers who have the money to back up their wants will receive the products
produced.
Suggested answers to multiple choice questions and
four-part question
Multiple choice questions
1 B
These are the three fundamental economic questions.
2 A
Firms are motivated by profit. To earn high profits, firms seek to keep costs low and revenues
high. Firms would not try to encourage rivals to enter the market, as their entry would make it
more difficult for the existing firms to earn high profits.
3 B
Resources are allocated by the price mechanism in a market economy. If a product becomes
more popular, consumers will be willing to pay more for it and hence more resources will be
devoted to its production. Directives allocate resources in a planned economy. Directives and the
price mechanism are used in a mixed economy.
4 A
Market forces are the factors that determine the price of a product in a market. These factors are
demand and supply. They push up price when demand increases or supply decreases.
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Cambridge IGCSE and O Level Economics
Four-part question
a Any two from: what to produce, how to produce it and for whom to produce.
b Market equilibrium is where demand and supply are equal. In this situation, there is no reason
for price to change. This is because the market clears with no products left unsold and no willing
buyers unable to purchase the product.
In contrast, market disequilibrium occurs when demand and supply are not equal. There is either
a surplus or a shortage. This lack of balance between demand and supply causes the price to
change until demand and supply are again equal.
c The price mechanism has three main functions. It acts as a rationing device. When demand
exceeds supply, price is driven up. The rise in price reduces demand until it again equals supply.
Those who receive the product will be those who are still willing and able to buy the product at
this higher price.
The price mechanism provides producers with useful information about changes in consumer
demand. It signals to them which products are becoming more popular and which are becoming
less popular. If consumers demand more of a product, its price will rise. Similarly, if they demand
less of a product, its price will fall.
As well as providing producers with information about changes in consumer demand as well as
changes in supply, it also gives them an incentive to respond to those changes. Producers can
earn more profit by producing products in high demand whereas they may make a loss if they
make products people do not want to buy.
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