Scarcity Choice and the Allocation of Resources

8/12/2019 Scarcity Choice and the Allocation of Resources

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Agent Objectives

Specialist Terminology

Utility is a measure of relative satisfaction. In other words, it is a

term referring to the total satisfaction received by a consumer from

consuming a good or service. Given this measure, one may speak

meaningfully of increasing or decreasing utility.

Economic welfare: The level of prosperity and quality of living

standards in an economy. Economic can be measured through a

variety of factors such as GDP and other indicators which reflect

welfare of the population (such as literacy, number of doctors, levels

of pollution)


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Adam Smiths The invisible hand

The price mechanism

One of the Founding Fathers of economics

famously wrote of the invisible hand of the

price mechanism.

The price mechanism is a term used to

describe the means by which the many millions

of decisions taken each day by consumers andbusinesses interact to determine the allocation

of scarce resources between competing uses.

This is the essence of economics!


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The Role of Price and Profits in a Free Market Economy

Known as the MARKET MECHANISM

3 key functions:

Signalling function

Incentive function

Rationing function

The higher the price the more

attractive it is for entrepreneurs

to supply the good or service(as it is more profitable to sell).

The price therefore provides an

INCENTIVE for suppliers to

supply the good or service.

The higher the price the less

consumers can buy, forcing

them to RATION their choices,

cutting back on the choices they

consider to be the poorest value

for money.

High prices indicate potential

profits for producers and send a

SIGNAL for firms to increase

output or for new firms to enter

the market to increase

availability


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Real World Example of the 3 functions of

the Market Mechanism

Recent increase in oil prices, making petrol moreexpensive for car owners

Car owners will then start to try and limit or ration the

amount of petrol they consume, cutting back on demand

Higher prices have now made harder to access oilfieldssuch as those in the Arctic Circle in northern Canada

viable business ventures for firms like BP and Shell,which will increase supply

The high selling price may encourage entrepreneurs toopen new petrol forecourts

RATIONING

SIGNALING

INCENTIVE


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Jan 11

5 mark define question


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The price of chicken falls. Explain the consequences of this given

the 3 key functions of price in a free market economy.


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Summary

Resources are allocated by the 3 functions of

the price mechanism. A change in price results

in a reallocation of resources due to the 3

functions of the price mechanism signalling,incentive and rationing.

Role of incentives in decision making

The environment is a scarce resource which is

affected by economic decisions


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Investigative Task

Identify a product thats price is rising in theeconomy

Try to find a few reasons why this price is rising

Explain in your book how you would expect thisto impact on:Consumers

Producers currently operating in the marketRetailers currently operating in the market

Entrepreneurs looking for ideas to make profit

Topical choices: petrol, food


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Further Reading

Tutor 2 u sheet

Documents

Scarcity Choice and the Allocation of Resources