Allocation of resources Flashcards
Define microeconomics
the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.
It involves supply and demand in individual markets, individual consumer behaviour, and individual labour markets
Define macroeconomics
Study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation.
Involves decisions made by the government regarding
What is the market economy?
A market economy is an economic system in which economic decisions and the pricing of goods and services are guided by the interactions of supply and demand- the market mechanism
The basic economic problem of scarcity creates three key questions. What are they?
What to produce?
How to produce?
For whom to produce?
How does the price mechanism provides answers to these key allocation questions?
It aids the resource allocation decision making process. The decision is made at the equilibrium point where supply and demand meet
Features of price mechanism?
Private Economic Agents can allocate resources without any intervention from the government
Goods and Services are allocated based on price (Higher Price means more supply and lower price means more demand)
Allocation of Factors of Production is based on financial returns
Competition creates choices and opportunities for firms, private individuals and consumers
What is demand?
Demand refers to how much of a product or service is desired by buyers
How is demand related to price?
Higher price of good = less people demand that good, hence, demand is inversely related to price
What are the factors that affect demand?
Price
Advertising
Government Policies
Consumer tastes/preferences
Consumer Income
Prices of substitute/ complementary goods
Interest rates (price of borrowing money)
Consumer population (population increase = demand increase)
Weather
What is the individual demand?
the demand of one individual or firm
What is the market demand?
represents the aggregate of all individual demands
What is supply?
Supply represents how much the market can offer
How is supply related to price?
Higher price of good = higher quantity supplied, hence quantity is directly proportional to price
What are the factors of supply?
Cost of factors of production
Prices of other goods/services
Global factors
Technology advances
Business optimism/expectations
What is the individual supply?
the supply of an individual producer
What is the market supply?
the aggregate of the supply of all firms in the market
What is the Market Equilibrium
When supply & demand are equal in the economy
At this point, the allocation of goods is at its most efficient because amount of goods being supplied is the same as amount of goods being demanded & everyone is satisfied
Causes of Price Changes
A change in supply
A change in demand
Consequences of Price Changes
An inward shift of the supply curve will increase prices and vice versa
An inward shift of the demand curve will decrease prices and vice versa
What is the Price Elasticity of Demand?
The responsiveness of demand to a change in price
How do you calculate PED?
% change in price
What happens when demand is price inelastic?
An increase in price would raise revenue
What happens when demand is price elastic
A decrease in price would raise revenue
Factors that affect PED
The number of substitutes
The period of time
The proportion of income spent on the commodity
The necessity of the product
What is the Price Elasticity of Supply?
The responsiveness of quantity supplied to a change in price
How do you calculate PES?
% change in quantity supplied
Factors that affect PES
Time
Availability of resources
Supply available to meet demand
Spare production capacity available
Factor substitution available
What is the Market Economic System
This system is run by private firms and individuals
They produce a wide variety of goods and services if it is profitable to do so but only for those consumers that are willing and able to pay for them
Market failures can cause scarce resources to be allocated to uses that are wasteful, inefficient or even harmful to people and the environment
Advantages of market economy system
Wide variety of goods/services
Profit motive encourages development of new and more efficient products & processes
Quick response to change in consumers tastes and demand
No taxes on incomes and wealth or goods and services
Disadvantages of Market economy system
Serious market failure
Only profitable goods provided
Firms will only supply products to consumers with the ability to pay
Resources will only be provided if it is profitable to do so
Harmful goods may be
available to buy readily
How does market failure occur?
Market failure occurs when the market mechanism fails to allocate scarce resources efficiently, so social costs are
greater than social benefits
What are social costs?
Private Costs + External Costs
What are social benefits?
Private Benefits + External Benefits
What are private costs?
The production and consumption costs of a firm, individual or the government
What are private benefits?
The benefits of the production and consumption to the firm, individual or government.
What are external costs?
External Costs are the negative side-effect on third parties for which the consumer doesn’t pay for.
What are external benefits?
The positive side-effects enjoyed by the third-parties.
Causes and consequences of market failure
Only goods and services that are profitable to make will be produced
Public goods and services such as street lighting won’t be provided as it is not possible for the private sector to earn profits from them
Resources only employed if profitable people may be left unemployed without an income
Harmful goods may be produced and sold freely
Producers may ignore environmental impacts
Monopolies dominate supply of products and charge high prices
What is a mixed economic system?
Has a private sector & a public sector
A government can try to correct market failures in a mixed economic system
It can allocate scarce resources to provide goods and services that people need
Can introduce laws and regulations to control harmful activities
What are maximum prices?
This is a price control method which involves the government setting the price below the equilibrium point to make things
more affordable
What are minimum prices?
Government sets the price above the equilibrium to encourage the supply of certain goods.
This involves National Minimum Wage (NMW) as well.
What are government interventions to address market failure
Produce merit goods such as education for the needy
It can provide public goods such as street lighting
Public sector can employ people and welfare benefits can be given to the needy
Laws to make goods illegal or high taxes to reduce consumption
Laws and regulations would protect natural environment
Monopolies can be broken up or regulated to keep prices low
Educating consumers about the private costs of consuming demerit goods
What is privatisation?
Privatisation is the transfer of all assets from the public to the private sector
What is nationalisation?
Nationalisation is the purchase of all assets by the government
