AQA ECON 1: MARKETS AND MARKET FAILURE

1.1.4 Scarcity, choice and the allocation of resources

Use economic terminology to explain the concept of scarcity.

What is the basic economic problem?

1.1.4 WHAT YOU NEED TO KNOW

Candidates should appreciate that the choices made to deal with the problem of scarcity affect the allocation of resources

They should understand the role of incentives in influencing choices

Candidates should understand that the environment is an example of a scarce resource, which is affected by economic decisions

THE NATURE OF A COMPETITIVE MARKET

A market is where buyers and sellers come together to exchange goods and services, normally at a price

A competitive market is where buyers and sellers have no influence on the price set for products

Buyers demand products

Sellers supply products

Goods are physical or tangible, you can touch them e.g. a jumper

Services are non-physical or intangible, you can’t touch them e.g. insurance

A product is either a good or a service.

French Economist Antoine Augustin

Cournot (1801-1877) was the first person

to graphically represent supply and

demand curves.

English Economist Alfred Marshall

(1842-1924) later popularised demand and supply theory.

His book the Principles of

Economics, written in 1890, is a landmark in Economics literature.

THE ROLE OF MARKETS IN ALLOCATING SCARCE RESOURCES

In most economies markets are used to allocate scarce resources through the price mechanism

If price is set too high a firm may not be able to sell all of its goods and services

If price is set too low a firm will lose out on revenue

This gives a signal to a firm as to what price to charge for the scarce resources that it sells

Should markets be left to allow the price

mechanism to determine prices or

should the Government intervene?

THE CHOICES MADE TO DEAL WITH THE PROBLEM OF SCARCITY AFFECT THE

ALLOCATION OF RESOURCES

There are alternative uses for economic resources

As wants are infinite but resources limited we must decide how to distribute or allocate these resources

Any choice made will affect how we allocate the resources available

We use the price mechanism to help us allocate these scarce resources

ALLOCATION OF RESOURCES IN A COMPETITIVE MARKET

Competitive markets influence choice

The price mechanism is the medium through which scarce resources are allocated

An increase in demand will see a rise in prices, and vice versa

An increase in supply will see a fall in prices, and vice versa

The price at which demand and supply equal each other is called the equilibrium price

OPPORTUNITY COST

What do you think is meant

by the term opportunity

cost?

Can you write a definition?

OPPORTUNITY COST

Opportunity cost can be defined as the benefit lost of the next best alternative when making a choice

As all resources are scarce we must make choices in order to allocate these resources

There are always competing alternatives when making choices e.g. should I buy a Pepsi or a Fanta

If I buy a Fanta I have lost the benefit of the closest alternative, a Pepsi

There is an opportunity cost for all decisions made by economic units

The opportunity cost of HS2.

What would you choose?

THE ROLE OF INCENTIVES IN INFLUENCING CHOICES

The price mechanism is the process that allows markets to operate

The rationing function impacts on choice:

Changes in demand and supply lead to changes in price, thus making goods and services more or less attractive

The signalling function impacts on choice:

Changes in price are a signal to consumers and producers as to whether to leave or enter a market

The incentive function impacts on choice:

Consumers and producers are motivated to a certain course of action i.e. buying and selling dependent on whether price is rising or falling

As seen in 1.1.1 economic

incentives are the reasons for

economic agents providing goods

and services. They also inform

consumers when demanding goods

and services.

In pairs explain how

each function can influence

choice.

ECONOMIC DECISIONS AFFECT THE ENVIRONMENT AS A SCARCE

RESOURCE

Land is an essential element in the production of goods and services

Unfortunately, the production process can exploit land to the detriment of the environment

Exploitation of land has lead to serious environmental problems:

Resource depletion as non-renewable resources are being exploited that can never be used again

Resource degradation as the use of resources impacts negatively on the quality of life e.g. pollution and the destruction of habitat, wildlife and cultures on a global scale

Decisions made by economic agents can therefore create serious costs to society

However, effective economics can benefit society by redressing these problems

The environment is the surroundings in which

we live.

It includes man-made as well as natural resources.

Economic activity has a major impact on the

environment.

Can we really measure the

cost of economic activity?

QUICK TEST

Which of the following is an accurate definition of opportunity cost?

a) The cost of resources used to meet demand

b) The cost of one option in terms of the next best option foregone

c) The cost of advantages offered through specialisation

d) The cost of combining the factors of production to start a new business

Can you explain your answer?

TEST YOURSELF

1. Explain how the price mechanism is used to allocate scarce resources.

2. Explain why buying a bottle of water has an opportunity cost.

3. Why is the environment an example of a scarce resource?