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The Role of Markets and Prices.pptx
1. THE ROLE OF MARKETS &
PRICES
Economic Questions
2. SCARCITY AND SOCIETY
• Due to scarcity, societies and countries are forced to make some
difficult decisions.
• To aid in this process different systems have evolved over time.
• Economic System – the method used by a society to produce
and distribute goods and services based on its values and goals.
3. THE 4 ECONOMIC QUESTIONS
• Each society must answer the following economic questions…
•
• What goods and services should be produced?
• How should these goods and services be produced?
• How much should be produced?
• Who consumes these goods and services?
4. 1. WHAT SHOULD BE PRODUCED?
• What should be produced? (e.g. Farmer decides to
plant an extra 500 hectares in wheat to meet extra
demand in pasta industry)
• What types of goods and services will satisfy the
needs and wants of the society.
• No point producing something that is not required.
5. 2. HOW SHOULD IT BE PRODUCED?
• Each society must determine how to use its
factors of production to meet the demands of
that society.
• Land,
• Labor and
• Capital
• e.g. A factory introduces $55,000 computerised
machine, redeploy 5 staff to sales
• The most efficient way to use the resources
available to you (land, labour, capital and
enterprise) to produce goods and services.
• The minimum opportunity cost to the society.
• Depends on the level of technology, the kinds
of goods and services, and the scarcity of
resources (labour and capital).
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6. TWO TYPES OF PRODUCTION.
• Labour intensive (abundance of low cost labour)
• Large quantities of labour, little capital. (less
developed countries)
• Capital intensive ((abundance of low cost capital –
high cost labour)
• Large quantities of low capital equipment.
(advanced modern economies)
7. HOW MUCH TO PRODUCE?
• The amount and types of resources available
determines how much can be produced
• Society must decide how much to produce of
each goods and service based on this
criteria.
• Produce too little of something regarded as
important people will be unsatisfied
• Produce too much and you will waste
precious resources.
8. 4. WHO CONSUMES THE PRODUCTS?
• How to distribute (for whom should the
goods be produced and how equally
distributed)?
• Who decides the quantities of goods and
services each should receive from the total
produced.
• The answer to this is how the society
chooses to distribute income.
• Decision: equal or unequal distribution of
income (how much inequality)
• The way in which a country or small
community answers these questions will
determine the type of economic system it
will develop.
9. WHO GETS ACCESS TO GOODS AND
SERVICES?
• Possible government intervention to share
wealth to those that do not contribute to
production process such as the aged,
unemployed and disabled (taxes, social
security, pension)
10. PRICE MECHANISM
• Adam Smith spoke of the ‘invisible hand’
– through the pursuit of individual self-
interest, resources are allocated in
society’s best interests
• “The means by which the many millions of
individual decisions each day by
consumers & firms interact to determine
the allocation of scarce resources.”
11. THE SIGNALLING FUNCTION
• Market prices adjust to ‘signal’ to producers where resources are needed more and
less
• Eg. if consumers want more iPods and less portable CD players, prices for iPods will
rise, signalling to producers to allocate resources to their production
12. INCENTIVE FUNCTION
• Prices provide incentive for consumers & producers to use resources in the most
efficient way
• Eg. high prices encourage efficiency; low prices encourage utilisation of less valued
resources
13. RATIONING FUNCTION
• Resources are scarce
• Prices allocate resources to those willing to pay
• Eg. the more scarce a resource, the higher its price will be and the less people will
want / be able to have it