In the Circular Flow of Income, the Allocation of Resources

question 48

Multiple Choice

In the circular flow of income, the allocation of resources is largely decided by

• A)central authorities and firms only.
• B)individuals only.
• C)central authorities only.
• D)firms and households acting independently.
• E)political parties and firms only.

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Definitions:

Allocative Efficiency

A state of resource allocation in which it is impossible to make any one individual better off without making at least one individual worse off.

Incentive Function

The role of rewards or penalties in motivating individuals or entities to behave in certain ways.

Rationing Function

The ability of market prices to allocate scarce resources among competing uses, ensuring that only those willing and able to pay the price can obtain the good or service.

Equilibrium Economic Rent

The additional income received by a factor of production, due to its scarcity or unique value, when the market is in equilibrium.