Allocation of Resources Chapter Notes | Economics for GCSE/IGCSE - Year 11 PDF Download

 Page 1


Allocation of resources
Microeconomics and Macroeconomics
? Microeconomics
? The study of the behavior and decisions of households and firms, and the performance of
individual markets
? Small scale
? Macroeconomics
? The study of the whole economy
? Large scale
? Market
? An arrangement which brings buyers into contact with sellers
? Those who undertake economic activities and make economic decisions are called economic agents
? These economic agents are ? households, firms and governments
? Household
? They are buyers or consumers, savers or workers
? They seek lower prices and good quality products/ good conditions and high pay
? Firms
? They are business concerns that produce goods and services, employ workers and other
factors of production
? They seek to make as much profit as possible
? Government
? It is the system which rules a country or region. A government produces and provides some
products, provides financial benefits and taxes and regulates the private sector
? Government seeks for strong economy (full employment of labour) and improve performance of
individual markets by taxing sale of cigarettes
Role of markets in allocating resources
? What to produce
? This question is necessary because resources are limited but wants are unlimited. Society
wants a lot of goods and services but everything cannot be produced.
? Society must choose among the wide assortment of alternatives when selecting which goods to
produce
? How to produce it
? Society must decide which limited resources to use for which good. Every good cannot be made
using the same resources
? For whom to produce it
? With limited resources, the production of goods is also limited. With limited goods, everyone
cannot have everything
? Economic system
? The institutions, organisations and mechanisms that influence economic behaviour and
determine how resources are allocated
Page 2


Allocation of resources
Microeconomics and Macroeconomics
? Microeconomics
? The study of the behavior and decisions of households and firms, and the performance of
individual markets
? Small scale
? Macroeconomics
? The study of the whole economy
? Large scale
? Market
? An arrangement which brings buyers into contact with sellers
? Those who undertake economic activities and make economic decisions are called economic agents
? These economic agents are ? households, firms and governments
? Household
? They are buyers or consumers, savers or workers
? They seek lower prices and good quality products/ good conditions and high pay
? Firms
? They are business concerns that produce goods and services, employ workers and other
factors of production
? They seek to make as much profit as possible
? Government
? It is the system which rules a country or region. A government produces and provides some
products, provides financial benefits and taxes and regulates the private sector
? Government seeks for strong economy (full employment of labour) and improve performance of
individual markets by taxing sale of cigarettes
Role of markets in allocating resources
? What to produce
? This question is necessary because resources are limited but wants are unlimited. Society
wants a lot of goods and services but everything cannot be produced.
? Society must choose among the wide assortment of alternatives when selecting which goods to
produce
? How to produce it
? Society must decide which limited resources to use for which good. Every good cannot be made
using the same resources
? For whom to produce it
? With limited resources, the production of goods is also limited. With limited goods, everyone
cannot have everything
? Economic system
? The institutions, organisations and mechanisms that influence economic behaviour and
determine how resources are allocated
Different economic systems
? Planned economic system
? An economic system where the government makes the crucial decisions, land and capital are
state owned and resources are allocated by directives.
? It is an economy where the government makes all the decisions about what to produce, how
and who. The state owns all or most of the land and capital and employs workers
? Government gives directives to state-owned enterprises(SOE’s) on what to produce and how to
produce it
? It usually is made for basic necessities and important products like housing, transport and
education, free of cost or at a low price
? Mixed economy system
? An economy in which both the private and public sectors play an important role
? Market economy system
? An economic system where consumers determine what is produced, resources are allocated by
price mechanism and land and capital are privately owned.
? In the market economic system, government intervention is minimum. Land and capital are
privately owned. Private sector firms decide how to produce the products
? Free enterprise economy
? 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/consumers determine what is produced. They signal their preferences
to sellers through price mechanism
? Price mechanism ? the way the decisions made by households and firms interact to decide the
allocation of resources
? Some firms use large amounts of capital relative to labour. These are capital-intensive(use of high
proportion of capital to labour)
? Others for e.g. hotels require more labour, therefore they are labour intensive(the use of high proportion
of labour relative to capital)
? Demand ? the willingness and ability to buy a product
? Supply ? the willingness and ability to sell a product
? Market equilibrium ? a situation where demand and supply are equal at the current price
? Market disequilibrium ? a situation where demand and supply are not equal at the current market price
? Price increases if demand increases or supply decreases
Demand
? Demand
? The willingness and ability to buy a product
? Demand and price are inversely proportional
? If the price rises, the willingness and ability to buy that product falls
? Market demand ? total demand for a product
Page 3


Allocation of resources
Microeconomics and Macroeconomics
? Microeconomics
? The study of the behavior and decisions of households and firms, and the performance of
individual markets
? Small scale
? Macroeconomics
? The study of the whole economy
? Large scale
? Market
? An arrangement which brings buyers into contact with sellers
? Those who undertake economic activities and make economic decisions are called economic agents
? These economic agents are ? households, firms and governments
? Household
? They are buyers or consumers, savers or workers
? They seek lower prices and good quality products/ good conditions and high pay
? Firms
? They are business concerns that produce goods and services, employ workers and other
factors of production
? They seek to make as much profit as possible
? Government
? It is the system which rules a country or region. A government produces and provides some
products, provides financial benefits and taxes and regulates the private sector
? Government seeks for strong economy (full employment of labour) and improve performance of
individual markets by taxing sale of cigarettes
Role of markets in allocating resources
? What to produce
? This question is necessary because resources are limited but wants are unlimited. Society
wants a lot of goods and services but everything cannot be produced.
? Society must choose among the wide assortment of alternatives when selecting which goods to
produce
? How to produce it
? Society must decide which limited resources to use for which good. Every good cannot be made
using the same resources
? For whom to produce it
? With limited resources, the production of goods is also limited. With limited goods, everyone
cannot have everything
? Economic system
? The institutions, organisations and mechanisms that influence economic behaviour and
determine how resources are allocated
Different economic systems
? Planned economic system
? An economic system where the government makes the crucial decisions, land and capital are
state owned and resources are allocated by directives.
? It is an economy where the government makes all the decisions about what to produce, how
and who. The state owns all or most of the land and capital and employs workers
? Government gives directives to state-owned enterprises(SOE’s) on what to produce and how to
produce it
? It usually is made for basic necessities and important products like housing, transport and
education, free of cost or at a low price
? Mixed economy system
? An economy in which both the private and public sectors play an important role
? Market economy system
? An economic system where consumers determine what is produced, resources are allocated by
price mechanism and land and capital are privately owned.
? In the market economic system, government intervention is minimum. Land and capital are
privately owned. Private sector firms decide how to produce the products
? Free enterprise economy
? 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/consumers determine what is produced. They signal their preferences
to sellers through price mechanism
? Price mechanism ? the way the decisions made by households and firms interact to decide the
allocation of resources
? Some firms use large amounts of capital relative to labour. These are capital-intensive(use of high
proportion of capital to labour)
? Others for e.g. hotels require more labour, therefore they are labour intensive(the use of high proportion
of labour relative to capital)
? Demand ? the willingness and ability to buy a product
? Supply ? the willingness and ability to sell a product
? Market equilibrium ? a situation where demand and supply are equal at the current price
? Market disequilibrium ? a situation where demand and supply are not equal at the current market price
? Price increases if demand increases or supply decreases
Demand
? Demand
? The willingness and ability to buy a product
? Demand and price are inversely proportional
? If the price rises, the willingness and ability to buy that product falls
? Market demand ? total demand for a product
? Aggregation ? addition of individual components to arrive to a total amount
? Extension in demand
? A rise in the quantity demanded caused by a fall in price of the product itself
? Price is inversely proportional to demand, which means a higher rise in demand causes a
steeper fall in price which is harmful if it gets too low.
? Contraction in demand
? A fall in the quantity demanded caused by a rise in the price of the product itself
? Conditions of demand
? Changes in demand ? shifts the demand curve either left or right
? Increase in demand
¦ A rise in demand at any given price, causing the demand curve to shift to the right
? Decrease in demand
¦ A fall in demand causing the demand curve to shift to the left
Page 4


Allocation of resources
Microeconomics and Macroeconomics
? Microeconomics
? The study of the behavior and decisions of households and firms, and the performance of
individual markets
? Small scale
? Macroeconomics
? The study of the whole economy
? Large scale
? Market
? An arrangement which brings buyers into contact with sellers
? Those who undertake economic activities and make economic decisions are called economic agents
? These economic agents are ? households, firms and governments
? Household
? They are buyers or consumers, savers or workers
? They seek lower prices and good quality products/ good conditions and high pay
? Firms
? They are business concerns that produce goods and services, employ workers and other
factors of production
? They seek to make as much profit as possible
? Government
? It is the system which rules a country or region. A government produces and provides some
products, provides financial benefits and taxes and regulates the private sector
? Government seeks for strong economy (full employment of labour) and improve performance of
individual markets by taxing sale of cigarettes
Role of markets in allocating resources
? What to produce
? This question is necessary because resources are limited but wants are unlimited. Society
wants a lot of goods and services but everything cannot be produced.
? Society must choose among the wide assortment of alternatives when selecting which goods to
produce
? How to produce it
? Society must decide which limited resources to use for which good. Every good cannot be made
using the same resources
? For whom to produce it
? With limited resources, the production of goods is also limited. With limited goods, everyone
cannot have everything
? Economic system
? The institutions, organisations and mechanisms that influence economic behaviour and
determine how resources are allocated
Different economic systems
? Planned economic system
? An economic system where the government makes the crucial decisions, land and capital are
state owned and resources are allocated by directives.
? It is an economy where the government makes all the decisions about what to produce, how
and who. The state owns all or most of the land and capital and employs workers
? Government gives directives to state-owned enterprises(SOE’s) on what to produce and how to
produce it
? It usually is made for basic necessities and important products like housing, transport and
education, free of cost or at a low price
? Mixed economy system
? An economy in which both the private and public sectors play an important role
? Market economy system
? An economic system where consumers determine what is produced, resources are allocated by
price mechanism and land and capital are privately owned.
? In the market economic system, government intervention is minimum. Land and capital are
privately owned. Private sector firms decide how to produce the products
? Free enterprise economy
? 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/consumers determine what is produced. They signal their preferences
to sellers through price mechanism
? Price mechanism ? the way the decisions made by households and firms interact to decide the
allocation of resources
? Some firms use large amounts of capital relative to labour. These are capital-intensive(use of high
proportion of capital to labour)
? Others for e.g. hotels require more labour, therefore they are labour intensive(the use of high proportion
of labour relative to capital)
? Demand ? the willingness and ability to buy a product
? Supply ? the willingness and ability to sell a product
? Market equilibrium ? a situation where demand and supply are equal at the current price
? Market disequilibrium ? a situation where demand and supply are not equal at the current market price
? Price increases if demand increases or supply decreases
Demand
? Demand
? The willingness and ability to buy a product
? Demand and price are inversely proportional
? If the price rises, the willingness and ability to buy that product falls
? Market demand ? total demand for a product
? Aggregation ? addition of individual components to arrive to a total amount
? Extension in demand
? A rise in the quantity demanded caused by a fall in price of the product itself
? Price is inversely proportional to demand, which means a higher rise in demand causes a
steeper fall in price which is harmful if it gets too low.
? Contraction in demand
? A fall in the quantity demanded caused by a rise in the price of the product itself
? Conditions of demand
? Changes in demand ? shifts the demand curve either left or right
? Increase in demand
¦ A rise in demand at any given price, causing the demand curve to shift to the right
? Decrease in demand
¦ A fall in demand causing the demand curve to shift to the left
? Increase in demand (moves to the right)
? Decrease in demand ( moves to the left)
Causes of change in demand (PIRATES)
? Population
? The larger the population, the higher the demand. Changing the structure of the population also
affects demand such as distribution of different age groups
? Income
? If consumers have more disposable income, they are able to afford more goods so demand
increase
? Related goods
? They are substitutes and complements.
? A substitute can replace another good. If the price of substitute falls, the quantity demanded of
the original good will also fall because consumers will switch to the cheaper option.
? A complement goes with another good. For e.g. cream is complementary good for strawberries.
If the price of strawberries increases, the demand for cream will fall as fewer people will be
buying strawberries. And if demand for strawberries increases, the demand for cream increases
with it.
? Advertising
? This will increase consumer loyalty to the good and increase demand
? Tastes and fashions
? Demand curve will also shift if consumers' tastes change. For e.g. demand of physical books will
fall if consumers start preferring to read e-books
? Expectations
? If spectators expect the price of shares in a company to increase in the future, demand is likely
to increase in present
Page 5


Allocation of resources
Microeconomics and Macroeconomics
? Microeconomics
? The study of the behavior and decisions of households and firms, and the performance of
individual markets
? Small scale
? Macroeconomics
? The study of the whole economy
? Large scale
? Market
? An arrangement which brings buyers into contact with sellers
? Those who undertake economic activities and make economic decisions are called economic agents
? These economic agents are ? households, firms and governments
? Household
? They are buyers or consumers, savers or workers
? They seek lower prices and good quality products/ good conditions and high pay
? Firms
? They are business concerns that produce goods and services, employ workers and other
factors of production
? They seek to make as much profit as possible
? Government
? It is the system which rules a country or region. A government produces and provides some
products, provides financial benefits and taxes and regulates the private sector
? Government seeks for strong economy (full employment of labour) and improve performance of
individual markets by taxing sale of cigarettes
Role of markets in allocating resources
? What to produce
? This question is necessary because resources are limited but wants are unlimited. Society
wants a lot of goods and services but everything cannot be produced.
? Society must choose among the wide assortment of alternatives when selecting which goods to
produce
? How to produce it
? Society must decide which limited resources to use for which good. Every good cannot be made
using the same resources
? For whom to produce it
? With limited resources, the production of goods is also limited. With limited goods, everyone
cannot have everything
? Economic system
? The institutions, organisations and mechanisms that influence economic behaviour and
determine how resources are allocated
Different economic systems
? Planned economic system
? An economic system where the government makes the crucial decisions, land and capital are
state owned and resources are allocated by directives.
? It is an economy where the government makes all the decisions about what to produce, how
and who. The state owns all or most of the land and capital and employs workers
? Government gives directives to state-owned enterprises(SOE’s) on what to produce and how to
produce it
? It usually is made for basic necessities and important products like housing, transport and
education, free of cost or at a low price
? Mixed economy system
? An economy in which both the private and public sectors play an important role
? Market economy system
? An economic system where consumers determine what is produced, resources are allocated by
price mechanism and land and capital are privately owned.
? In the market economic system, government intervention is minimum. Land and capital are
privately owned. Private sector firms decide how to produce the products
? Free enterprise economy
? 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/consumers determine what is produced. They signal their preferences
to sellers through price mechanism
? Price mechanism ? the way the decisions made by households and firms interact to decide the
allocation of resources
? Some firms use large amounts of capital relative to labour. These are capital-intensive(use of high
proportion of capital to labour)
? Others for e.g. hotels require more labour, therefore they are labour intensive(the use of high proportion
of labour relative to capital)
? Demand ? the willingness and ability to buy a product
? Supply ? the willingness and ability to sell a product
? Market equilibrium ? a situation where demand and supply are equal at the current price
? Market disequilibrium ? a situation where demand and supply are not equal at the current market price
? Price increases if demand increases or supply decreases
Demand
? Demand
? The willingness and ability to buy a product
? Demand and price are inversely proportional
? If the price rises, the willingness and ability to buy that product falls
? Market demand ? total demand for a product
? Aggregation ? addition of individual components to arrive to a total amount
? Extension in demand
? A rise in the quantity demanded caused by a fall in price of the product itself
? Price is inversely proportional to demand, which means a higher rise in demand causes a
steeper fall in price which is harmful if it gets too low.
? Contraction in demand
? A fall in the quantity demanded caused by a rise in the price of the product itself
? Conditions of demand
? Changes in demand ? shifts the demand curve either left or right
? Increase in demand
¦ A rise in demand at any given price, causing the demand curve to shift to the right
? Decrease in demand
¦ A fall in demand causing the demand curve to shift to the left
? Increase in demand (moves to the right)
? Decrease in demand ( moves to the left)
Causes of change in demand (PIRATES)
? Population
? The larger the population, the higher the demand. Changing the structure of the population also
affects demand such as distribution of different age groups
? Income
? If consumers have more disposable income, they are able to afford more goods so demand
increase
? Related goods
? They are substitutes and complements.
? A substitute can replace another good. If the price of substitute falls, the quantity demanded of
the original good will also fall because consumers will switch to the cheaper option.
? A complement goes with another good. For e.g. cream is complementary good for strawberries.
If the price of strawberries increases, the demand for cream will fall as fewer people will be
buying strawberries. And if demand for strawberries increases, the demand for cream increases
with it.
? Advertising
? This will increase consumer loyalty to the good and increase demand
? Tastes and fashions
? Demand curve will also shift if consumers' tastes change. For e.g. demand of physical books will
fall if consumers start preferring to read e-books
? Expectations
? If spectators expect the price of shares in a company to increase in the future, demand is likely
to increase in present
? Seasons
? Demand changes according to the season. For eg. in the summer, the demand for ice cream
and sun lotion increases
? Normal goods
? A product whose demand increases when income increases and decreases when income falls
? Inferior goods
? A product whose demand decreases when income increases when increase when income falls
? Substitute
? A product that can be used in place of another
? Complement
? A product that is used together with another product
Supply
? Supply
? The willingness and ability to sell a product
? Market supply
? Total supply of a product
? Supply and price are directly proportional
? Extension in supply
? A rise in quantity supplied is caused by a rise in the price of the product itself
? Contraction in supply
? A fall in the quantity supplied caused by a fall in the price of the product itself
? Increase in supply
? A rise in supply at any given price, causing the supply curve to shift to the right
? Decrease in supply
? A fall in supply at any given price, causing the supply curve to shift to the left