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Allocation of Resources
The 3 basic problems
1) What to Produce?2)How to Produce?
3) For Whom to Produce?
We have to allocate resources
The allocation of resources in a country can be done in 3 ways:
1)Market Economic System2) Mixed Economic System
3) Planned Economic System
Which one do you like?
Market Economy• Consumers decide what to produce.
• Private property
• Changes in supply and demand control the prices
• No Government Intervention
• Market economy is an ideal which does not exist today
Advantages……….• Freedom for everyone
• No Government Intervention
• Variety of goods and services are produced – Consumer Choice
• High consumer satisfaction
• It is Efficient
• Has • Private Sector – privately
owned• Public Sector – owned by
govt.
• Govt produces some goods. Eg: Roads, Hospitals, Schools, etc
• Government intervention is very less.
Mixed Economy
• Government decides what to produce
• Everything owned by government – No private ownership
• Government decides the prices
• No consumer choice
Planned Economy
The amount of money a product
is worth is called its “Price”
A place (any size) where a buyer buys & seller sells is called MARKET
What is Demand?• Demand is the quantity of a product that
consumers are –Willing to buy–Able to buy–At a price–Over a period of time
• Individual demand - the demand of one consumer
• Market demand is the total demand of all the consumers.
The law of demand
When goods are cheap, People buy more
When goods are expensive, People buy less
The Demand Curve
D
3000 5000 7000
2000
1600
800
Price ($)
Quantity
The demand curve shows the quantity demanded at any given price.
The Demand Curve
Q
P
R
The Demand Schedule
Price of a computers
Quantity demanded per week
2000 10001800 20001600 30001400 40001200 5000
The Demand Schedule shows quantities demanded at given price (usually set by the producer)
Changes in Demand Curve
• The changes can be• Movement along Demand Curve• Shifts of Demand Curve
0 1 2 3 4 5
0
10
20
3
0
40
50
60
Price
Quantity
Movement of Demand Curve
0 1 2 3 4 5
0
10
20
3
0
40
50
60
As the price changes, the quantity demanded will also change.
Price
Quantity
0 1 2 3 4 5
0
10
20
3
0
40
50
60
Price
Quantity
Shift of Demand Curve
0 1 2 3 4 5
0
10
20
3
0
40
50
60 At the same price, a
different quantity is demanded.
Price
Quantity
Why Demand Changes?
Income
Population
Other factorsTaste &
Fashion
Prices of RelatedGoods
• Fashion of cloth changes Demand changes• A research shows that dark chocolate is
healthy Demand ↑• More people want to become vegetarian
Demand of meat ↓• If Advertising of a product is successful
demand ↑
Taste & Fashion
Volkswagen
VW's most legendary advertising campaign of all time. From then to now, every company has measured the success against the Think Small campaign.
• Disposable income = Income – Tax
• Income ↑ Demand↑• Income ↓ Demand ↓
IncomeIncome
• If population is more Demand is more
PopulationPopulation
Price of Related Goods
Related Goods
Substitute Goods
Goods which can replace each other
Complement Goods
Goods used together
Price of Related Goods
Substitute Goods
P ↑ D ↑
P↓ D ↑
P ↑ D ↓
P↓ D ↓D↓
Complement Goods
Weather
Expectations of future prices changes• If consumers expect prices ↑ Demand ↑ now
• If consumers expect prices ↓ Demand ↓ now.
Other Factors
The supply curve
• Supply is the quantity of a product that suppliers are –willing to sell –Able to sell –At various prices –Over a period of time
What is Supply?
• Individual Supply - the supply of one Firm/ Producer
• Market Supply is the total Supply of the Market
The law of Supply
When goods are cheap, producer sell less
When goods are expensive, producer sell more
The Demand Curve
The Supply curve shows the quantity supplied at any given price.
The Supply Curve
40
80
120
160
200
10 20 30 40 500 60 70
S
Pric
e
0Quantity
The Supply Schedule
The Supply Schedule shows quantities supplied at given price
Price of a PC($)
Quantity supplied per week
800 1000
1000 2000
1200 3000
1400 4000
1600 5000
Changes in Supply Curve
• The changes can be• Movement along Supply Curve• Shifts of Supply Curve
Movement of Supply Curve
Pric
e
Quantity
$15A
1,250 1,500
B$30
SAs the price
changes, the quantity supplied will also change.
Shift of Supply Curve
Pric
e
Quantity
SS1
$15A B
1,250 1,500
S2
At the same price, a different quantity is supplied.
Why Supply Changes?
Taxes
Subsidies
Other factorsTaste &
Fashion
Cost of Production
Cost of Production (COP)
COP↑ supply ↓ & COP ↓ supply ↑
COP may change due to change in……. –Wages (Salary)–Productivity (output per worker)–Raw material–Energy costs (Electricity)–Transport costs
If government puts taxes COP ↑ Supply ↓
IncomeTaxes
• If the government gives a subsidy COP ↓ Supply ↑
PopulationSubsidies
Price of Related Goods
Related Goods
Profitability of goods in joint
supply
Profitability of substitutes in
supply
Price of Related Goods
The Profitability of Goods in Joint Supply
• DVD Players and DVD are produced together.
• When the Price of DVD Players ↓ Demand of DVD Players ↑ So more DVDs are needed So the Supply of DVDs ↑) also increase.
The Profitability of Substitutes in Supply
• If Mango Juice becomes more PROFITABLE than Apple Juice, producers will produce more Mango juice .
SoSupply of Mango juice ↑ & Supply of Apple Juice ↓
War Weather - Earthquakes , floods & fireThe breakdown of machineryExpectations of future prices changes
– If producers expect prices ↑ Supply ↓ now & will build up STOCKS
– If producers expect prices ↓ Supply ↑ now & reduce production
Other Factors
WHO DECIDES THE PRICE OF THE
PRODUCT?
• Demand & Supply of a product determines the PRICE of a product!!!
• When
• Demand = Supply Equilibrium
• Demand ≠ Supply Disequilibrium
48
Demand = Supply (Equilibrium Point)
AS Economics Unit 2 Chapter 7 49
• Surplus – Supply > Demand
• Shortage – Demand > Supply
Why the Equilibrium Changes?
–Change in Demand–Change in Supply–Change in Demand & Supply
