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Chapter 6 The Role of Markets in Allocating Resources

The document discusses different economic systems and how they answer the fundamental economic questions of what to produce, how to produce it, and who receives what is produced. It describes the three main systems: planned, mixed, and market. In a market system, consumers determine what is produced through their demand in the market and prices allocate resources. Government intervention is described for mixed economies to address market failures. A planned economy has the government make all production and distribution decisions through directives.

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Dhrisha Gada
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762 views19 pages

Chapter 6 The Role of Markets in Allocating Resources

The document discusses different economic systems and how they answer the fundamental economic questions of what to produce, how to produce it, and who receives what is produced. It describes the three main systems: planned, mixed, and market. In a market system, consumers determine what is produced through their demand in the market and prices allocate resources. Government intervention is described for mixed economies to address market failures. A planned economy has the government make all production and distribution decisions through directives.

Uploaded by

Dhrisha Gada
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 6: The role of markets

in allocating resources
STUDY WITH SWATI
Maximizing Learning Potential
The 3
Fundamental
Economic
Questions
• What to produce?
• How to produce it?
• Who is to receive the products produced?
Referral Video Link
https://youtu.be/FClSQBnjrSQ
What is the answer to ‘Who is to receive the
products produced?’
Do you think it should be done according to people’s needs or their
ability to earn a high income?

VS
The
Economic
Systems
The answer is both. But it
depends on which
economic system is under
operation!
So, what is
an
economic
system? • An economic system is a system that contains the
institutions, organizations and mechanisms that
influence economic behaviour and determine how
resources are allocated.
The 3 main economic systems
PLANNED SYSTEM MIXED SYSTEM MARKET SYSTEM
An economic system where the An economy in which both the An economic system where
government makes the crucial private and public sectors play consumers determine what is
decisions, land and capital are state an important role produced, resources are allocated
owned and resources are allocated by the price mechanism and land
by directives and capital are privately owned
What is price
mechanism?
It is the way the decisions
made by households and
firms interact to decide the
allocation of resources.
Goods and services are
bought and sold in a market
at an equilibrium price
where demand and supply
are equal. This is called the
price mechanism.
Referral Video Link
https://youtu.be/njTKa-dnJPo
• A market equilibrium is a situation where the demand
and supply are equal at the current price.

• Producers produce the good that consumers demand in a


way that is cost-efficient and will be produced for those
who are willing and able to buy the product.

• Resources switch from products that are less popular to


products that are more popular. Consumers signal their
change in preferences to producers through the prices
they are willing to pay for different products.
• The price mechanism provides an incentive for producers
to respond to changes in market conditions.

• Price mechanism rations out products. A surplus will


cause a fall in supply till markets are cleared with demand
equalling supply. A shortage causes prices to rise until the
market again clears with demand equalling supply.
THE
MARKET
ECONOMIC
SYSTEM
Benefits of a market system:
• Variety and Choice of goods & services produced to satisfy consumer wants

• Firms respond quickly to changes in consumer wants and spending patterns


leading to allocative efficiency

• The profit motive of firms encourages them to develop new products and use
the most efficient methods of production leading to productive efficiency

• There are no taxes

• Lower prices for customers

• Better quality goods


How the market
system fails:
• Market failure: when free
markets fail to produce
goods and services that are
worthwhile or when the
decisions of producers or
consumers result in wasteful
or harmful activities
• Market disequilibrium: a
situation where demand and
supply are not equal at the
current price
In a mixed economy the government can intervene in different markets in attempt to
correct market failure by:

• Providing useful and essential goods and services


• Providing goods & services for people in the greatest need
• Employing people in public sector orgs & provide financial support to private sector firms
to boost output & employment
• Outlawing the production of harmful goods & dangerous activities
• Outlawing business practices that restrict competition or mislead consumers
The Mixed
Economy
•A mixed economy, therefore,
combines the advantages of a
market economic system with:

- Government ownership and


control of some scarce resources

- Government interventions to
regulate actions of private sector
firms and consumers in some
markets
The Planned Economy
• Also known as centrally planned, command or collectivist economy.
• Government decides what to produce, how to
produce the product and who receives the
products

• Government determines what product is


made and controls prices

• State gives instructions called directives

• Land and capital are state owned


Referral • https://youtu.be/puSkuAoJD0g
Video Link

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