Resource Allocation and Demand in Economics
Unit 1: The Economic Problem of Scarcity and Resource Allocation
Resource Allocation
Resource allocation in an economic area involves combining existing resources with needs. It means matching resources and needs according to a scale of preferences, choosing concrete objectives, and ranking them based on those preferences. Most countries utilize a market economy (where individual needs are contrasted with their satisfaction), prevalent in Western and some Eastern countries. However, government intervention often occurs, even in market economies, to guarantee success. This intervention can be direct (affecting production) or indirect (influencing production conditions). This creates a mixed economy where market forces and government intervention coexist. Today, these mechanisms are often linked with political and social factors, such as pluralist democracy in market economies and authoritarian, one-party systems in centrally planned economies.
Production Possibilities of a Society
A society’s primary problem is distributing scarce resources, raising the question: What combination of products can be produced using all resources? The production possibility frontier represents the maximum efficiency points where all resources are utilized. All points on this curve signify maximum efficiency with existing technology and resources. These frontiers are dynamic, shifting over time, with decreases being difficult or nearly impossible (barring catastrophes).
The Market, Perfect Competition, and Imperfect Competition
A market encompasses everything surrounding the production and exchange of goods and services. In our complex economy, a benchmark price is essential. It provides information and incentives to producers, informing both buyers and sellers about product values. Prices act as scarcity indicators, varying accordingly. Some markets are dominated by a few firms (oligopolies), while others have many. A monopoly exists when there’s only one company. A perfectly competitive market has numerous buyers and sellers, where prices are determined by impersonal forces, and individual choices don’t significantly impact market prices.
The Economic Circuit
The economic circuit illustrates the interrelationships between sectors in a national economy. The continuous flow demonstrates how operations within each sector balance inputs and outputs. It shows the relationship between households and businesses (selling goods and services, paying wages). The financial sector channels savings through loans and credits. The public sector (government) influences the economy through taxes and public services, also interacting with businesses. Finally, economic systems are open, engaging in international trade through exports and imports.
Unit 2: Elementary Theory of Demand
Individual Demand
Demand is a list or table showing the quantities of a good or service that consumers are willing to buy at different prices. The demand curve graphically represents this relationship. It typically slopes downwards from left to right, indicating that as price decreases, quantity demanded increases. Demand depends not only on price but also on household income, prices of other goods, and consumer preferences.
Demand and Household Income
Changes in household income logically affect demand. Normal goods see increased demand with rising incomes, eventually reaching a stable point. Inferior goods experience decreased demand after a certain income level. Luxury goods see consumption rise as income increases.