Allocation of resources

• Economic agents undertake economic activitiesand make economic decisions
• Households-low prices/good quality products
• Firms- Earning maximum profit
• Government - Maximising welfare
• The economy is the sum total of all markets, firms and households.
• Markets are where buyers and sellers meet to exchange goods or services at an agreed price.
• The government can intervene to correct market failures through policies such as subsidies or taxes.
• Market failure occurs when the market does not allocate resources efficiently, resulting in an allocation that is less than optimal.
• There are two types of markets; perfect competition and imperfect competition.
• A free market is one that operates without any intervention from the government.
• In a perfectly competitive market, there will be many small businesses selling identical products with no barriers to entry.
• Demand and price are inversely related
• Changes in demand:

  Changes in income

  Changes in price of complementary/substitute product

  Advertising campaigns

  Population

  Changes in taste and fashion
• supply and price are directly related
• Changes in supply:

  Taxes

  Subsidies

  Change in price of any factor of production

  Changes in productivity
• Determinants of PED:

  Availability of substitutes

  Proportion of income spent

  How defined the market is

  Necessity or luxury
• Determinants of PES:

  Time taken to produce it

  Cost of altering its supply

  Feasibility of storing it
• Benefits of a market System:

  Choice

  Prices may be low

  Good quality
• Disadvantages of a market System:

  Advertising

  Differences in income will increase

  Potential monopolies
• indicators of market failure:

  Shortages

  Surpluses

  Lack of innovation
• Market failure can be avoided by:

  Making it easier for new firms to enter a market

  Make uncompetitive practices illegal

  Can stop firms from merging
• Benefits gained as a result of government intervention in a mixed economic system

  Take into account all costs and benefits

  Prevent exploitation of customers

  Seeks to make maximum use of resources
• government measures to addresss market failures:

  Competition policies

  Environmental policies

  proper regulation of rules and law