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Role of Enterprise and Imperfect Information in Consumer Outcome


‘The factor enterprise and the free working of the price mechanism always ensure a satisfactory outcome for consumers even when imperfect information exists.’ Discuss this view.


Market Structures and Competition

[CIE AS level May 2016]

Preview Answer

Step ➊ : Define ‘enterprise’ and ‘price mechanism’ in the introduction.

The free market relies on the price mechanism and enterprise in order to determine the allocation of resources. Firms start when entrepreneurs organise resources and take risks in the expectation of earning a profit. In order to achieve this, firms will respond to consumer demands and preferences. In a free-market economy, there is no government intervention at and all decisions are taken by individuals and firms. However, due to information failure, consumers may not be aware of the beneficial or harmful effects of certain goods and services. Consequently, it will be seen that the free market will not always ensure a satisfactory outcome for consumers.

Step ➋ : Discuss whether the factor enterprise and the price mechanism is beneficial to consumers.

2.1 In a free market resources are allocated through the price mechanism and enterprise, this ensures that all consumer needs and wants are met.

2.1.1 The benefit of the price mechanism to consumers.

In a free market, the price mechanism determines the production, utilization of resources, and pricing. This means that the customers make the ultimate decision on which products succeed or fail. The forces of demand and supply determine what goods and services will be produced, how they will be produced and for whom will they be produced. For example, if consumers decide they want more of a good, demand will exceed supply and prices will rise. This is a signal to suppliers to expand production to meet the higher demand.

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