2. The allocation of resources
- Syllabus
- 0455–2027–2028
- Section
- 2
- Level
- —
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In this section
Topic 2.1
2.1. The role of markets in allocating resources
Objectives in this topic
2.1.1—How markets work
- definition of a market
- examples of markets
- roles of buyers and sellers
Topic 2.2
2.2. Demand
Objectives in this topic
2.2.1—Individual and market demand
- definition of demand
- link between individual demand and market demand
- drawing and interpretation of the demand diagram
2.2.2—Movements along a demand curve
- causes of extensions and contractions in demand
- diagrams that illustrate movements along a demand curve
2.2.3—Shifts of a demand curve
- causes of decreases and increases in demand
- diagrams that illustrate shifts of a demand curve
Topic 2.3
2.3. Supply
Objectives in this topic
2.3.1—Individual and market supply
- definition of supply
- link between individual supply and market supply
- drawing and interpretation of the supply diagram
2.3.2—Movements along a supply curve
- causes of extensions and contractions in supply
- diagrams that illustrate movements along a supply curve
2.3.3—Shifts of a supply curve
- causes of decreases and increases in supply
- diagrams that illustrate shifts of a supply curve
Topic 2.4
2.4. Price determination
Objectives in this topic
2.4.1—Price mechanism
- how the price mechanism provides answers to the basic resource allocation decisions of what, how and for whom to produce
2.4.2—Market equilibrium
- equilibrium price and equilibrium quantity in a market:
- definition of market equilibrium
- interpretation of equilibrium using demand and supply schedules
- drawing and interpretation of equilibrium using demand and supply curves
2.4.3—Market disequilibrium
- disequilibrium prices and quantities:
- definition of market disequilibrium
- interpretation of disequilibrium using demand and supply schedules
- drawing and interpretation of disequilibrium using demand and supply curves
- shortages (demand exceeding supply) and surpluses (supply exceeding demand)
Topic 2.5
2.5. Price changes
Objectives in this topic
2.5.1—Causes of price changes
- how price changes are caused by changes in demand and supply
2.5.2—Consequences of price changes
- effect of price changes on sales
- use of demand and supply diagrams to illustrate the impact of changes in market conditions
Topic 2.6
2.6. Price elasticity of demand (PED)
Objectives in this topic
2.6.1—Definition of PED
- Definition of PED
2.6.2—Calculation of PED
- calculation of PED using the formula
- interpretation of the significance of the PED value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic
- drawing and interpretation of demand curve diagrams to show different PED
2.6.3—Determinants of PED
- main influences on whether demand is elastic or inelastic
2.6.4—PED, consumer expenditure and firms’ revenue
- effect of price changes on the amount spent by consumers and revenue raised by firms, shown both in a diagram and as a calculation
- relationship between PED and the amount spent by consumers and revenue raised by firms
2.6.5—Significance of PED
- implications of PED for decision-making by consumers, workers, producers/firms and government
Topic 2.7
2.7. Price elasticity of supply (PES)
Objectives in this topic
2.7.1—Definition of PES
- Definition of PES
2.7.2—Calculation of PES
- calculation of PES using the formula
- interpretation of the significance of the PES value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic
- drawing and interpretation of supply curve diagrams to show different PES
2.7.3—Determinants of PES
- main influences on whether supply is elastic or inelastic
Topic 2.8
2.8. Market economic system
Objectives in this topic
2.8.1—Definition of the market economic system
- Definition of the market economic system
2.8.2—Arguments for and against the market economic system
- advantages of the market economic system
- disadvantages of the market economic system
Topic 2.9
2.9. Market failure
Objectives in this topic
2.9.1—Definition of market failure
- Definition of market failure
2.9.2—Definitions of terms associated with market failure:
- public goods, merit goods, demerit goods, private benefits, external benefits, social benefits, private costs, external costs, social costs, monopoly
2.9.3—Causes of market failure
- causes relating to public goods, merit goods, demerit goods, external costs and external benefits, abuse of monopoly power
2.9.4—Consequences of market failure
- implications of misallocation of resources in relation to:
- the over-consumption of demerit goods and goods with external costs
- the under-consumption of merit goods and goods with external benefits
- the non-provision of public goods
- restricted supply causing higher prices under a monopoly Note: demand and supply diagrams relating to market failure are not required.
Topic 2.10
2.10. Mixed economic system
Objectives in this topic
2.10.1—Definition of the mixed economic system
- Definition of the mixed economic system
2.10.2—Arguments for and against the mixed economic system
- advantages of the mixed economic system
- disadvantages of the mixed economic system
2.10.3—Government intervention to address market failure
- definitions, drawing and interpretation of diagrams, advantages and disadvantages of:
- maximum and minimum prices in product markets
- indirect taxation
- subsidies
- definitions, advantages and disadvantages of:
- regulation
- privatisation
- nationalisation
- direct provision of goods and services
- quotas, e.g. for the extraction of natural resources