IGCSE Economics Notes The Roles of Markets in Allocating Resources

Summary Notes

• The Market System (2.2.1): A market system is an arrangement where buyers and sellers interact to allocate scarce resources. It includes the concepts of market equilibrium (when supply equals demand) and market disequilibrium (when supply and demand are mismatched).
• Key Resources Allocation Decisions (2.2.2): The economic problem creates three critical questions for resource allocation:
  • What to produce?
  • How to produce?
  • For whom to produce?
  These questions determine how resources are allocated within an economy.
• Introduction to the Price Mechanism (2.2.3): The price mechanism answers the three allocation questions by adjusting prices based on supply and demand. This system helps guide the production and distribution of goods and services efficiently.

Definition :

1. Market disequilibrium occurs when the quantity demanded does not equal the quantity supplied, leading to either shortages or surpluses of a product. 
2. Market Equilibrium: It is  where  the products offered for sale equal consumer demand 

Key Notes picked from Past Exam Papers:

1. The economic problem arises because resources are limited or finite, while human wants are unlimited or infinite. This imbalance leads to scarcity, meaning there are insufficient resources to meet all the wants. To address this, opportunity cost comes into play, which is the benefit obtained from the next best alternative that is foregone when making a decision. It represents the trade-off involved when resources are allocated for one purpose instead of another. The concept of opportunity cost is highly relevant to the allocation of resources, as it helps highlight the cost of choosing one alternative over another. Understanding opportunity cost ensures that resources are allocated efficiently, as it encourages decision-makers to compare the benefits of different alternatives and use resources in the most beneficial way.
2. The  key questions about how resources are allocated areWhat to produce, how to produce it, for whom / who gets what is produced.
3. In a mixed economic system, resources in the public sector are allocated through government decisions and directives, with products produced by state-owned enterprises to address market failure. In the private sector, resources are allocated by the price mechanism, driven by market forces, demand and supply, and consumer sovereignty, where profit incentives encourage firms to produce goods and services based on consumer demand.
4. In a market system, resources are allocated through market forces (supply and demand) via the price mechanism. Resources are privately owned with little or no government influence. The profit incentive motivates firms to produce goods and services based on consumer demand. When demand for a good or service rises, its price increases, encouraging firms to allocate more resources to its production.
5. The price mechanism influences resource allocation in a market economy through changes in demand and supply. An increase in demand raises the price, providing a financial incentive and profit motive for firms to supply more of the product. As a result, resources are diverted from less popular products to meet the increased demand. Conversely, an increase in supply reduces the price, leading to higher demand and more resources being allocated to the product. The price mechanism relies on demand and supply, with consumer sovereignty guiding production decisions. Firms are encouraged to use the most cost-efficient methods, such as opting for labor-intensive production if labor is readily available.