allocation of goods 2.2

Questions when thinking about the problem of resource allocation

1. What and how much to produce

2. How to produce

3. For whom to produce

What has to be made for resource allocations

A choice must be made due to unlimited wants but limited resources

What to produce

• which customers to satisfy

• What good and services to make/sell

• How many units of each good to produce

How to produce

• what tools / machinery (capital intensive)

• How many workers required (labour intensive)

• Which production methods to use

Who to produce for?

• everyone get the same?

• Poorer people

• Those with disabilities

Economic system

• guides countries on how to deal with the problem of resource allocation

Economic system definition

• the institutions , organisations and mechanisms that influence economic behaviour and determine how resource are allocated

3 main types of economic systems

1. Planned economy

2. Market/free market economy

3. Mixed economy

Planned economy

• all decision made by government

• State owned resource

• Eg. North Korea,Russia

Market economy

• no government intervention

• Decisions made by private sector consumers

• Resources are privately owned

• Eg. Hong Kong , us

Mixed company

• combines both market and planned system

• Both private and public sectors play a role in decision making

Market system characteristics

• All economic decisions are made by the private sector firms and individuals, there is no government intervention

• All resources are privately owned

• Everyone is assumed to be motivated by self interest

• Scarce resources are allocated through price mechanism

Everyone is assumed to be motivated by self- interest , why?

• consumers aim to maximise satisfaction (buy goods/services that give them the most satisfaction)

• Producers aim to maximise profits(This means they produce and sell goods and services that gives them the most prpfit)

Total profit formula

Total revenue - total cost

Scarce resources are allocated through the price mechanism , why?/ what does it mean

• this means that change in market price by which private firms and consumers interact to determine how the scarce resource are allocated

Price mechanism (price change due to supply/demand)+ resource allocation , what do producers produce if product is popular?

1. Producers goal is to maximise profits

2. Hence, they with respond to their customers demand and produce products that customers are willing and able to pay a higher price for

3. Thus, the scarce resources are now being reallocated to produce more of what the consumers want

Price mechanism (price change due to supply/demand)+ resource allocation , what do producers produce if product is not popular ?

1. Producers main goal is to maximise profits

2. Hence, when the demand for that product decreases, the market price will also decrease, causing that product to be less profitable

3. Firms will start production lesser of that product and re allocate their resources to produce other products that are more profitable

Market price

Acts as a “signal’ to guide producers on what produce

ice mechanism (price change due to supply/demand)+ resource allocation , how to produce?

1. Producers goal is to maximise profits

2. Hence, will use cheapest possible method of production

3. They look at the amount they have to pay for each factor of production and therefore acts as a signal on how to bets produce the product

Price of the factors

• signal for produces to know how to produce a product

ice mechanism (price change due to supply/demand)+ resource allocation , whom do producers produce their product to?

1. Once the good is produced ,it is sold to anyone who Is willing and able to buy the product

2. Hence, the price determines who is able to get the good

Price

Determines who is able to get the good(for whom to produce)