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2. The allocation of resources

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  1. 2.1. The role of markets in allocating resources

    1. • definition of a market • examples of markets • roles of buyers and sellers

  2. 2.2. Demand

    1. • definition of demand • link between individual demand and market demand • drawing and interpretation of the demand diagram

    2. • causes of extensions and contractions in demand • diagrams that illustrate movements along a demand curve

    3. • causes of decreases and increases in demand • diagrams that illustrate shifts of a demand curve

  3. 2.3. Supply

    1. • definition of supply • link between individual supply and market supply • drawing and interpretation of the supply diagram

    2. • causes of extensions and contractions in supply • diagrams that illustrate movements along a supply curve

    3. • causes of decreases and increases in supply • diagrams that illustrate shifts of a supply curve

  4. 2.4. Price determination

    1. • how the price mechanism provides answers to the basic resource allocation decisions of what, how and for whom to produce

    2. • 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

    3. • 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)

  5. 2.5. Price changes

    1. • how price changes are caused by changes in demand and supply

    2. • effect of price changes on sales • use of demand and supply diagrams to illustrate the impact of changes in market conditions

  6. 2.6. Price elasticity of demand (PED)

    1. • Definition of PED

    2. • 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

    3. • main influences on whether demand is elastic or inelastic

    4. • 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

    5. • implications of PED for decision-making by consumers, workers, producers/firms and government

  7. 2.7. Price elasticity of supply (PES)

    1. 2.7.1Definition of PES

      • Definition of PES

    2. 2.7.2Calculation 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

    3. 2.7.3Determinants of PES

      • main influences on whether supply is elastic or inelastic

  8. 2.8. Market economic system

    1. • Definition of the market economic system

    2. • advantages of the market economic system • disadvantages of the market economic system

  9. 2.9. Market failure

    1. • Definition of market failure

    2. • public goods, merit goods, demerit goods, private benefits, external benefits, social benefits, private costs, external costs, social costs, monopoly

    3. • causes relating to public goods, merit goods, demerit goods, external costs and external benefits, abuse of monopoly power

    4. • 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.

  10. 2.10. Mixed economic system

    1. • Definition of the mixed economic system

    2. • advantages of the mixed economic system • disadvantages of the mixed economic system

    3. • 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