A sudden surge in global demand for cobalt, an essential raw material for high-tech components, causes its market price to rise sharply. Within a free market economy, how does this price rise operate through the price mechanism to reallocate scarce resources?
It signals to consumers that cobalt has become more abundant, incentivising them to substitute it with cheaper alternatives while rationing producer revenue.
It acts as a signal of increased scarcity, incentivising producers to expand cobalt extraction while rationing the available supply to buyers willing and able to pay the higher price.
It enables government agencies to ration cobalt to key manufacturing sectors, incentivising mining firms to maintain low, stable prices.
It incentivises buyers to increase their quantity demanded immediately, signaling to producers that they should decrease supply to prevent a surplus.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.