In a market system, as one industry expands while another contracts, resources will flow:
A) Away from the expanding industry towards the contracting one
B) From one industry due to the changes in resource prices paid by firms
C) Towards the industry where the product demand is declining
D) Because resource allocation will have to equalize between the two industries

Question

Quizplus · Accepted Answer

In a market system, resources flow from one industry to another due to changes in resource prices paid by firms. As the expanding industry demands more resources, the prices of those resources increase, making it more profitable for firms in other industries to redirect their resources towards the expanding industry. Similarly, as the contracting industry demands fewer resources, the prices of those resources decrease, making it less profitable for firms to remain in that industry. Therefore, resources flow from one industry to another based on changes in relative prices.

In a Market System, as One Industry Expands While Another