AS How markets and prices allocate resources

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AS How markets and prices allocate resources

  1. 1. AS Economics Allocation of resources in a competitive market
  2. 2. How does the market work? • You have learnt about demand and supply, market-clearing prices, excess supply, excess demand, disequilibrium….. • All these put together should move the market towards equilibrium • But, how does this actually work? Can you explain it? • 10 mins to have a go!
  3. 3. Today’s objectives • Review who the economic agents are • Analyse the motives of economic agents • Understand the role of prices in allocating resources
  4. 4. and his
  5. 5. Who is he? What is he famous for? • Adam Smith! • In The Wealth of Nations (1776) Smith argued that an ‘invisible hand’ linked producers to consumers and society as a whole • This meant that the market mechanism would work automatically to link buyers and sellers to resolve the economic problems of: • What to produce • How to produce • Who to produce it for • He also argued that freely operating markets would work to everyone’s advantage
  6. 6. 3 Economic agents, who are they?
  7. 7. The agents and their motives 1. Consumers 2. Producers of goods and services 3. Owners of factors of production
  8. 8. The agents and their motives 1. Consumers Motive is to consume as many products and services as possible for the minimum outlay (amount spent) 2. Producers of goods and services Who will seek to make as much profit as possible 3. Owners of factors of production Who will sell land, labour, capital and enterprise to the highest bidder
  9. 9. Today’s objectives • Review who the economic agents are • Analyse the motives of economic agents • Understand the role of prices in allocating resources
  10. 10. Smith argued…. It’s all about competi tion!
  11. 11. Smith went on….that if each of these economic agents acted selfishly to pursue their own objectives, th e market system would ensure that resources would be used to produce those goods and services that were
  12. 12. and on…. The starting point of all of this is the consume r…
  13. 13. And then… You have a go!
  14. 14. Over to you
  15. 15. Prices have a crucial function in this. They…. • Ration scarce resources • Provide incentives to producers • Signal to producers, consumers and owners of factors.
  16. 16. Rationing • Consumers have unlimited wants yet resources are scarce • If the a resource is relatively scarce and demand is high the price will be ? • Supply will be rationed out to those consumers prepared to pay….? • On the other hand, is a resource is relatively plentiful, and demand is low, the price of the resource will be? • This ensures that…..? • Examples?
  17. 17. Incentives • High demand leading to high prices is an incentive for firms to…? • Why? • So therefore, low demand is associated with low…. • This would act a disincentive to…. • Examples?
  18. 18. Signals • Rising prices indicate to producers and consumers that…? • This provides a signal which can help the decision making of both producers and consumers. • Falling prices indicate to producers and consumers that…? • Examples
  19. 19. Today’s objectives • Review who the economic agents are • Analyse the motives of economic agents • Understand the role of prices in allocating resources
  20. 20. Extra hard question Why might the market not work? 1. Think about producers 2. Think about consumers

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