Chpt 6_ The role of markets in allocating resources.pptx

AO1 Understand the meaning of the market system and the price mechanism
A02 Be able to determine how the price mechanism is able to allocate resources efficiently
A03 Be able to evaluate instances where the price mechanism fails to allocate resources efficiently

1. The Allocation of Resources Unit- 2

2. Chapter 5: Microeconomics and macroeconomics Chapter 6: The role of markets in allocating resources Chapter 7: Demand Chapter 8: Supply Chapter 9: Price determination Chapter 10: Price changes Chapter 11: Price elasticity of demand Chapter 12: Price elasticity of supply Chapter 13: Market economic system Chapter 14: Market failure Chapter 15: Mixed economic system Contents of this unit

3. The role of markets in allocating resources 06

4. AO1 Understand the meaning of the market system and the price mechanism A02 Be able to determine how the price mechanism is able to allocate resources efficiently A03 Be able to evaluate instances where the price mechanism fails to allocate resources efficiently Objectives

5. Key resource allocation decisions WHAT TO PRODUCE? FOR WHOM TO PRODUCE? HOW TO PRODUCE?

6. ECONOMIC SYSTEM Institution Organisation Mechanism (they influence the economic behaviour & determine how resources are allocated)

7. PLANNED ECONOMY 1.MEANING 2.EXAMPLE 3.CHARACTERISTICS 4.PROS AND CONS MIXED ECONOMY 1.MEANING 2.EXAMPLE 3.CHARACTERISTICS 4.PROS AND CONS MARKET ECONOMY 1.MEANING 2.EXAMPLE 3.CHARACTERISTICS 4.PROS AND CONS RESEARCH

8. PLANNED ECONOMY An economy which operates a planned economic system is called a planned, centrally planned, command or collectivist economy. It is an economy in which the state (government) makes the decisions about what to produce, how to produce it and who receives it. The state owns all, or at least most, of the land and capital, and employs workers TYPES OF ECONOMIC SYSTEM

9. An economy which operates a market economic system is known as a market economy or a free enterprise economy. It is one in which buyers, also known as consumers, determine what is produced. They signal their preferences to sellers through the price mechanism. I n a market economic system, government intervention is minimal. Land and capital are privately owned. Private sector firms decide how to produce the products consumers want to buy MARKET ECONOMY

10. MIXED ECONOMY An economy in which both the private and public sectors play an important role. I.e. both are involved.

11. Price mechanism Provides an incentive to the producer to respond to changes in the market conditions.

12. CAPITAL INTENSIVE When firm uses more capital than labor LABOR INTENSIVE When firm uses more labor than capital.

13. Market Equilibrium When supply and demand are equal at the current price so that the allocation of goods is most efficient at this time.

14. Market Disequilibrium When supply and demand are not equal at the current price . Shortage is when there is excess demand and surplus is when there is excess supply

15. Disequilibrium Demand > supply Price is below equilibrium Consumers are demanding more than firm is able/willing to produce at current price level Firms increase price At higher prices consumers demand less Prices will increase until equilibrium is reached where supply = demand A market may be in disequilibrium in the short-term but will always be in equilibrium in the long-term.

16. Key terms P rice mechanism - the means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses (Invisible Hand – Adam Smith ) Supply – goods/services being sold by the firm Demand – goods/services bought by the consumer Equilibrium – market clearing. The price and quantity where supply = demand Disequilibrium – market does not clear. Short-term – all factors of production are variable except capital Long-term – all factors of production are variable Capital - all those man-made goods which are used in further production of wealth

17. What to produce? The commodities which do not command positive prices in the market would not be produced. Therefore only those commodities with positive prices are to be produced and in such a way that would clear the markets. The quantity in which a commodity is to be produced is set at that level where demand equals supply. Firms will produce the product which offers them the biggest potential of profit. A firm will always seek to cover its opportunity cost The price mechanism determines what and how much firms will supply and what and how much individuals will consume.

18. How to produce? T echnology means the correct proportion in which the different factors of production are to be employed. There are two types of techniques. A labour-intensive technique would employ relatively more labour and less capital. On the other hand, capital- intensive technique means more capital and less labour. The price mechanism will determine the firm's’ production mix between labour and capital If labour (wage) is cheap relative to capital then the firm will be labour intensive (developing economies) If capital is cheap relative to labour then the firm will be capital intensive (developed economies)

19. For whom to produce? A commodity can be consumed only by people who have more purchasing power. Price mechanism determines the income of the workers, i.e. purchasing power. The price mechanism means that if you cannot afford to pay the price then you cannot buy the good/service. Some goods/services are considered essential for all of society. Education, healthcare, infrastructure, parks are such examples. Should only the wealthy be able to afford to consume these?