A Level Economics AQA Practice Exam

How do prices act as an incentive in economic behavior?

1. They restrict choices for consumers

2. They discourage firms from changing supply

3. They create motivations for altering economic behavior

4. They stabilize market fluctuations

The correct answer is: They create motivations for altering economic behavior

Prices serve as powerful incentives in economic behavior by influencing the decisions of both consumers and producers. When prices change, they send signals to the market that can motivate individuals and businesses to alter their actions. For instance, if the price of a product rises, it may encourage consumers to reconsider their purchasing habits, possibly opting for substitute goods or reducing overall consumption. Conversely, higher prices can incentivize producers to increase supply to take advantage of potentially higher revenue. This responsiveness to price changes reflects the fundamental economic principle of supply and demand. Prices act as a mechanism for resource allocation, guiding where and how resources should be distributed in an economy. For example, if there is a surge in demand for a certain good, leading to higher prices, firms might respond by ramping up production to meet that demand, creating opportunities for profit. In this way, prices motivate participants in the economy to adjust their behaviors in pursuit of optimal outcomes, whether that means consuming less, producing more, or seeking alternative products.