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The Role of Markets in Allocating Resources | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

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Lesson Objectives

  • The Market System
  • Key Resource Allocation Decisions
  • Introduction to The Price Mechanism

The Market System

  • What is the market system
    • A market system is where the the forces of demand and supply determine the price of the product
    • Government does not play a part in pricing the products
  • The role of buyers
    • The buyer or consumer of the product decide if they wish to purchase the product at a particular price.
    • Then, they also decide the quantity they are willing to buy at any given price.
  • The role of sellers
    • The sellers decide if they are willing to sell the product at any given price.
    • If so, they also decide the quantity of the product they are willing to supply at any given price.
  • The demand and supply curves are formed for the product.
    • Individual demand and supply is the demand and supply of a single person for a product
    • Market demand and Supply are the overall demand and supply of a product
      • They are formed by adding the individual demands and individual supplies of the product together.
  • The demand curve
    • We use the word curve, but at O Level / IGCSE Level, we can use straight lines as well.

  • This is the curve form. We can also represent by simple line

  • The supply curve and its line form can be shown the same way as well

 

 

  • In the market system, the demand and supply interact to decide the equilibrium point
    • The point where there is no surplus or shortage
    • The resources are allocated based on this demand and supply principles
      • The place of demand and supply interaction is called the equilibrium point
    • The equilibrium price is the price at which demand and supply interact
    • The equilibrium quantity is the quantity is the quantity where demand and supply interact

 

  • There are two situations where the market is in disequilibrium
    • Where demand exceeds supply
      • The shortage situation

      • Or we can have a situation where Quantity Supplied exceeds the Quantity Demands
        • Also called the surplus situation

Key resource Allocation Decisions

  • As we discussed earlier, there is the concept of opportunity cost due to scarcity and economic problem
  • Thus,
    • There are three  main economic questions that every economy has to answer
    • The answer to these questions determine how resources are allocated in the economy
  • Questions are
    • What to produce
      • What product will be made
      • Because making one thing will involve opportunity cost by leaving another thing.
    • How to produce
      • The methods of production
        • For example, capital intensive production or labor intensive production
    • For whom to produce
      • Who will get the produced goods
        • Not everyone can get it as resources are scarce so production is limited.

Introduction to price Mechanisms

  • Already discussed in the first section of this class
    • Market price mechanism
      • Demand and supply decide the allocation
      • And answer to key questions
  • State-oriented economy
    • Government decides the price levels
    • And what to produce and how to produce it.
  • The price levels
    • Decide who can afford the product
Hunain Zia

Hunain Zia has previously achieved considerable success in the high-school educational stream, gaining a massive 154 Total A Grades and 7 Major Distinctions, a process in which he broke/ set 11 different world records, including the most A grades ever achieved, most subjects ever appeared in, most distinctions, gaining distinctions across two separate boards (Pearson Edexcel and CAIE) within the same year/ ever, and even 19 hours of constant examination. All records stand intact today. Hunain pursued his Honors Accounting Degree from the prestigious Bentley University, and then completed an LLB (in Honors) from University of London. Currently, he manages multiple social and commercial projects, has founded digital streams and works tirelessly in the education sector.

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