IGCSE Economics CIE Section 2 – The Allocation Of Resources Practice Test

The main concept here is how a market uses price signals and consumer demand to allocate resources. In a market economy, what gets produced is driven by what consumers are willing and able to buy. Prices reflect scarcity and value, so when demand for a product rises, prices go up and resources shift into its production; when demand falls, prices drop and production can move toward other goods. This price mechanism coordinates producers' decisions and keeps resources flowing toward where they’re valued most, without central planning. The other systems don’t rely on this voluntary, price-driven guidance: a command economy uses central planners to decide what to produce, a traditional economy follows long-standing customs, and a mixed economy blends market forces with some government intervention. So the described system is the market economy.