Topic 2 - The Allocation of Resources 5 PDF
Topic 2 - The Allocation of Resources 5 PDF
Topic 2 - The Allocation of Resources 5 PDF
Price mechanism
• Prices respond to shortages & surpluses
• Price rises: consumers ration
• Reduces amount they are willing/able to buy
o Tells producers there is excess supply in the market
• Gives suppliers incentive to decrease supply
o Shortages causes price to rise
o Surpluses causes prices to fall
Market system - method of allocating resources through market forces of demand & supply
• Goods are bought/sold in a market at an equilibrium price
• Producers produce goods that consumers demand the most
Market equilibrium
• Demand = supply for a good
• Demand changes e.g. ↑income: people can afford more goods
• Supply changes e.g. weather impacts supply (drought) = ↓ crops)
• Market is more likely to be in state of disequilibrium than equilibrium
• Demand & supply constantly change
Economic questions
1. What to produce
2. How to produce
3. For whom to produce
Price mechanism - system of relying on market force of demand & supply to allocate resources
2.3 Demand
Demand – the willingness and ability to buy a product
Effective demand: willingness to buy is backed by the ability to pay for the purchase
Quantity demand: effective demand for a particular goods
• E.g. Want a phone but don't have the money to buy (demand)
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GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources
• Have the money to buy (effective demand)
Individual demand: demand from one customer
Market demand: total (aggregate) demand; sum of all individual demands of consumers
↓ price (80 to 60) = ↑ demand ↑ demand (500 to 600) ↓ demand (500 to 400) without
(300 to 500) • ↑ demand due to changes in change in price
• Extension in demand from A other factors (excluding • ↓ demand for a product due
to B price) to changes in other factors
• Causes shift to the right (A to (excluding price)
↑ price (60 to 80) = ↓ in B) • Causes shift to the left (A to
demand (500 to 300) B)
2.4 Supply
Supply – the willingness of producers to supply a good or services at a given price
Quality supplied: amount of goods producers are willing to make & supply
Market supply: amount of goods all producers supplying the product are willing to supply
Supply curve
Law of supply
• Increased price = increased supply
• Decreased prices = decreased supply
Slopes down from right to left
• Higher supply = increase in price
Movements are due to change in price
• Increase in price = extension in supply (increase in quantity supplied)
• Decrease in price = contraction in supply (reduced quantity supplied)
Reasons for shifts
• Change in costs of production (COP)
o Producers can produce & supply products cheaply
o COP rises = supply falls
• Changes in quantity of resources available
o Resources rise = supply rises (vice versa)
• Technological changes (higher productivity/output)
• Profitability of other products
o Producers might shift to producing more profitable products (reduces supply of initial
product)
• Joint supply - when a product is made as a by-product of another
• Weather
• Regulation/bureaucracy
• Increased number of producers in the market
↑ price (60 to 80) = ↑ supply (500 to 700) ↑ supply without change in price (S to S1) due to
• ↓ supply due to changes in price (without changes in other factors (excluding
changes in other factors) price)
• Causes a contraction in supply
↓ supply without change in price (S to
Market disequilibrium
Disequilibrium price: price at which market demand & supply curves don’t meet
Calculation
% △ 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝐸𝐷 =
% △ 𝑝𝑟𝑖𝑐𝑒
Determinants of PED
1. Availability of close substitutes - ↑substitutes → products easily replace if ↑price → elastic
2. Proportion of income spent on products - ↑income, △price X matter → inelastic
3. Cost of substituting between products - ↑substitution cost → inelastic
4. Brand loyalty / habit - less sensitive to △price → inelastic
5. Advertisement - ↓PED → inelastic
6. Necessity - essential → inelastic, luxury → elastic
7. Durability - non-durable → inelastic, durable → elastic
8. Time - takes time for consumers to change habits → long run → elastic
Significance of PED
Firms Gov
• Determine price strategies to max revenue • Decide products to impose taxes (usually on
• Determine if use price discrimination inelastic products)
(Charge different customers different price of
same product coz differences in PED)
• Predict impact on producers following changes
in exchange rate
But - Difficult to calculate accurately as PED
changes constantly
Calculation
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GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources
% △ 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑
𝑃𝐸𝑆 =
% △ 𝑝𝑟𝑖𝑐𝑒
Determinants of PES
1. Spare capacity - if has spare capacity, can ↑supply → elastic
2. Level of stock - ↑stock ↑elastic
3. No of firms in industry - ↑no of firms ↑elastic
4. Ease & cost of factor substitution - if capital / labour occupationally mobile → elastic
coz resources can be mobilized to supply extra output
5. Time period & production speed - long time, firm adjust production level → elastic
Significance of PES
Firms Gov
• ↑ competitive • Ensure everyone has access to affordable products
• ↑ profit • Encourage migrant labour
• Relieve shortage of labour
• Improve PES in labour market
Adv Dis
1. Competition helps firms to pay 1. Income & wealth inequalities
attention & respond quickly to • Richer ppl have more choice & econ freedom
consumers wants • Producers meet needs & wants of rich ppl,
→ stimulate innovation, neglect poor ppl
↑efficiency
2. Environment issues
2. Freedom of choice • E.g. use non-renewable resources → pollution
• Producers & consumers choose
what to produce / consume
Private costs: direct costs of production & consumption of a individual, firm or gov
Eg (pro) wages, (con) price paid for goods by conusmers
External costs: -ve side-effects of production & consumption incurred by 3rd parties for which
no compensation is paid
Eg (pro) air, (con) passive smoking
Private benefit: benefits of production & consumption enjoyed by a individual, firm or gov
Eg To producer - profit received
To consumer - satisfaction gained
External benefit: +ve side effects of production & consumption experienced by 3rd parties for
which no money is paid
Eg vaccination protect surrounding ppl
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