Skip to content

CA Foundation · Business Economics · Nature and Scope of Business Economics

Which of the following is a recognised limitation of relying solely on the price mechanism to allocate resources?

A key limitation is that the price mechanism responds only to demand backed by purchasing power, so the needs of low-income people may go unmet. Efficient allocation, scarcity signalling and responsiveness to consumers are strengths rather than weaknesses.

  1. AIt rewards efficient allocation of scarce resources
  2. BIt responds to consumers' purchasing power and may ignore the needs of those with little incomeCorrect
  3. CIt conveys information about relative scarcity
  4. DIt encourages producers to respond to consumer demand

Explanation

The market responds to effective demand, which is backed by purchasing power. Poor people's needs may go unmet, and public goods or externalities may be ignored. The other options are strengths of the price mechanism, not limitations.

Did you get it right without looking?

One question tells you little. A timed set on Nature and Scope of Business Economics shows your real accuracy, how long you take and where you lose marks.

Practise Nature and Scope of Business EconomicsFree diagnostic mock

More Nature and Scope of Business Economics questions