Chapter 6: Role of Markets in Allocating Resources

• Market system: works to allocate scarce resources efficiently through the forces of demand and supply.
• Market equilibrium/disequilibrium: demand and supply of foods and services are equal/unequal.

  
• Questions to ask when determining resource allocation:

  • What production should take place?: deciding which goods and services should be provided in the economy
  • How should production take place?: methods and processes used to produce the desired goods and services
  • For whom should production take place?: which economic agents receive goods and services
• 3 economic market systems:

  • Free market economy: all decisions are taken by private sector individuals and businesses; little or no government intervention; decisions on resource allocation are decided by private sector organisations
  • Mixed economy: all decisions about resource allocation are taken together by the government and the private sector; government intervenes when the market fails to allocate resources efficiently
  • Planned economy: all decisions about resource allocation, prices and how goods and services will be produced and allocated are taken by the public sector
• Price mechanism:

  • A system of relying on the market forces of demand and supply to allocate resources
  • When the demand increases in the price mechanism, the price also increases, leading to the producers to supply more. This will generate higher profit and aid in economic growth. This happens vice versa, as when the demand decreases, the price also decreases, leading to producers supplying less of the product which lowers their profit and increases the unemployment rate.
• Features of price mechanism:

  • No government intervention
  • The private sector owns and allocates resources
  • High prices encourage suppliers to supply more; low prices encourage consumers to demand more
  • Resources are only allocated to products generating high revenues/profitable goods or are switched to it
  • Unprofitable goods and services are not produced
  • Businesses innovate and compete (creates choices for consumers, so high-quality products are made at competitive prices)