ECO101H1 Lecture Notes - Lecture 2: Resource Allocation, Opportunity Cost, Marginal Cost
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Explain why scarcity necessitates choices that answer the what to produce? question. Finite amount of resources decide on where to allocate them, depending on the signalling functions of priced. Explain why choice results in an opportunity cost. Every choice have a next best alternative forgone. Explain, using diagrams, that price has a signalling function and an incentive function, which result in a reallocation of resources when prices change as a result of a change in demand or supply conditions. Price has a signaling function and an incentive function, because when price goes up, sellers are more willing to make more products while consumers are less willing to buy the product because of its expensiveness. If price goes down, sellers are less willing to make products while consumers are more willing to buy products. Rise in price gives an incentive for the sellers to make more of the product. When demand for good increases, a temporary shortage occurs.
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