Unit 2 – The allocation of resources

CH5) Microeconomics and macroeconomics

Microeconomics
- microeconomics is the study of the individual markets and sections of the economy
- rather than the whole economy.
-examine the choices of individuals, households, and firms.
- It examines what factors influence their choices.
- It should examine the decisions affecting price, demand & supply of goods/ services in a
market
-The governments influence on consumption and production is also taken into
consideration.

Macroeconomics
– macroeconomics is the study of economic behaviour and decision making in the entire
economy rather than an individual market.
- It will examine the role of the government in achieving economic growth and human
development through the implementation of specific government policies.
- It looks at the government’s role in achieving price stability, low unemployment, and stable
account balances.
- It examines the interaction of the economy with the rest of the world through international
trade.

Market – market is an arrangement which brings buyers into contact with sellers.

Microeconomics macroeconomics
Single market e.g., eggs, milk Entire economy e.g.,
Singapore, India
Price of a good/service Average price levels in economy
Individual/ market demand Total demand
Individual firm/ market supply Total supply
Government intervention in market Government intervention in economy
e.g., cigarette e.g., income tax
Reasons for difference in workers’ Unemployment and minimum wages
wages

Connection between macroeconomics and microeconomics

The decisions and interactions made by microeconomics result in changes in
macroeconomics. Meaning, the changes in microeconomy affect the changes in
macroeconomy and vice versa. For example, if the result in the output of cars reduces the
car industry would cause a rise in the country’s unemployment rate. Similarly, removing
income tax would result in households buying more cars.
Economic agents – decision makers in micro and macro. E.g., households, firms &
government.

Households: buyers also known as consumers

Firms: business concerns that produce goods and services, as well as employ workers and
other factors of production.

Government: system which rules a country or region

Private sectors: owned by shareholders and individuals.

Public sectors: owned by the government.

Decision maker Choices they make in

Microeconomics
- Goods/ services they value
the most.
Consumers - Responding to changes in
market they consume in
- How to save/ spend/
borrow
- Combination of goods/
service to supply
- Best produce goods/
Firms services to meet objective.
(Profit maximization)
- Responding to changing
market conditions

- Which policies will be most

effectives in addressing
Governments specific market failures.
- Which industries/ markets
are essential and require
government support
Decision maker Choices they make in
macroeconomics
- How to best respond to
Consumers changing macroeconomic
conditions such as
recessions or interest rates.
- How to best respond to
changing macroeconomic
conditions such as
recessions, interest rate
Firms rises or low supply of
labour.
- Whether to sell their
goods/ services locally,
nationally or international.
- Determining best
Government combination of policies that
will help them to meet all
their macroeconomic aims
- Which countries to invest in
- How to best develop
international advantages
Multinational corporations (MNCs) - How to engage with the
government and local
workforce in a way that
maximises profit without
harming the brand image.
CH6) The role of markets in allocating resources

Economic decisions need to be made to answer three important questions.

1) What to produce? As resources are limited in supply decisions carry an opportunity

cost. Which goods/ service should be produced e.g., better rail services or more
public hospitals?
2) How to produce it? Would it be better for the economy to have labour-intensive
production so that more people are employed, or should goods/ services be
produced using machinery?
3) For whom are the goods and services to be produced? Should goods/ services only
be made available to those who can afford them, or should they be freely available to
all?

Economic system: The institutions, organisations and mechanisms that influence

economic behaviour and determine how resources are allocated.

Planned economic system: an economic system where the government makes the
crucial decisions, land and capital are state-owned and resources are allocated by
directives.

Directives: state instructions given to state-owned enterprises.

Mixed economic system: an economy in which both the private and public sectors
play a role.

Market economic system: an economic system where consumers determine what is

produced, resources are allocated by the price mechanism and land and capital are
privately owned.
 Type of system What to How to For whom?
produce? produce?
Demand & Most efficient, Those who can
Market system supply (the price profitable way afford it
mechanism) possible.
Demand, supply Some efficiency Those who can
Mixed system & the but also a focus afford it, plus
government on welfare/ some provision
well-being to those who
cannot afford it
The government Ensure
Planned system everyone has a everyone
job

How a market economic system works.

An economy which operates a market economic system is known as a market

economy or free enterprise company. A market system works to allocate resources
efficiently through the forces of demand and supply (price mechanism)

- Buyers/ consumers determine what is produced.

- No government intervention
- Land and capital privately owned.
- Private sector firms make all decisions.
- Capital intensive.

In a market system prices/ goods are determined by the interaction of demand and supply.
- Market can be considered any place which brings buyers and sellers together.
- Can be physical and virtual.
- Firms want low-cost method but produce high quality products.
- More productive capital equipment
- Those with high income have most influence.

Capital intensive: the use of a high proportion of capital relative to labour.

Labour intensive: the use of a high proportion of labour relative to capital

Price mechanism:
The interaction of demand and supply in a free market

resources move automatically – result of changes in price.

- Price change demands upon demand and supply
- Interaction determines price by which: scarce resources are allocated between
wants and needs.
 Functionality of price mechanism
- Prices allocate scarce resources.
- When resources become scarce, prices increase.
- Those who can afford will receive.
- If there is a surplus, price falls and more customers will be able to afford.

- Prices provide information to consumers where resources are required (markets

in which price increases) and where they are not (markets in which price falls)

- when price rises the producers want to reallocate from less profitable to this
market to maximise profit

Market equilibrium & disequilibrium

Equilibrium in a market occurs when demand = supply
- price is called market clearing price.
- price at which sellers are clearing stock at an acceptable rate.

CH7) Demand
Demand: willingness and ability to purchase a product

Advertising campaigns-
- increase demand for a product
- bring the product to notice (new consumers, encourage old)

Changes in population-
- if there is an increase in the number of people, demand will increase
- ageing population = people living longer, fall in birth rate
- e.g., demand for wheelchairs will increase

Changes in taste and fashion-

- products influenced by taste and fashion
- rise in vegetarianism will make meat demand decrease
- health reports can have significant influence
- rise in sport popularity = more athletic clothes (jerseys, etc)

Other-
- change in weather conditions
- expectations for future could affect current demand
- special events
How each of the conditions of demand shifts the entire demand curve at every price level

Condition explanation condition shift Condition shift

Changes in Real Income D Income D
real income income decreases increases decreases decreases
determines shifts shifts left
how many right (DD2)
goods/ (DD1.)
services
can be
enjoyed.

Direct
relationshi
p between
income and
demand for
goods/
services
Changes in If goods/ More D Good D
taste/ services fashionable increases becomes decreases
fashion become shifts less shifts left
more right fashionable (DD2)
fashionable (DD1)
demand
increase
Advertising If more Advertising D Advertising D
/ branding money increase increases decreases decreases
spent then shifts shifts left
demand right (DD2)
will (DD1)
increase
Changes in Changes in Price of D for Price of D for
the price of substitute good A good B good A good B
substitutes price will increases increases decreases decreases
influence shifts shifts left
demand right (DD2)
(DD1)
CH8) Supply

Supply: supply is the amount of a good/ service a producer is willing & able to supply at a
given price in a given time period

- supply curve sloping upward = positive relationship between price and QS

Individual and market supply –

market supply: total supply

- supply is directly related to price

- rise in price will lead to rise in supply
- firms will be more willing to supply the product, likely to earn more profit
- will be able to supply more since, higher price will cover production cost

effects of changes in price on supply:

- change in price will cause extension of supply. {extension: rise in quantity
supplied caused by a rise in the price of the product} or a contraction in supply
{contraction: a fall in the quantity supplied caused by a fall in the price of the
product itself}

changes in supply: conditions causing shifts in the supply curve.

- occurs when suppliers’ conditions alter

- different quantity will be offered for sale at each price.

shifts of supply curve –

several factors will change the supply, irrespective of price, called conditions of supply
- changes in any condition will shift supply curve
- increase in supply = shift to the right
- decrease in supply = shift to the left
condition explanation condition Shift condition Shift
Cost of If it costs COP S COP S
production more to increases decreases decreases increases,
produce, shifting shifting
suppliers left right
will want a (SS1) (SS2)
higher
price.

two basic
reasons for
change in
COP –
change in
price in any
of the
factors,
change in
productivity.

Firms
respond by
changing
supply
Indirect Indirect tax Taxes S S
taxes changes, increase decreases increases,
change the shifting shifting
cost to left right
produce, (SS2) (SS2)
impacting
the supply
Subsidies Being paid Subsidy S Subsidy S
by increases increases, decreases decreases,
government shifting shifting
right left (SS1)
(SS2)
Granting a
subsidy will
increase
supply

Changes to
producer
subsidies
directly
 impact firm
COP as well

New New Technology S Technology S

technology technology increases increases, decreases decreases,
increases shifting shifting
productivity right left
and lowers (SS2) (SS1)
costs of
production.
Ageing
technology
can have
the
opposite
effect
Change in The entry Number of S Number of S
the and exit of firms increases, firms decreases,
number of firms into increase shifting decreases shifting
firms in the market right left
the has a direct (SS2) (SS1)
industry impact on
the supply.
Weather Supply Drought S Good S
events shock can decreases, weather increases,
be caused shifting shifting
by droughts left (SS1) right
or flooding (SS2)
in
agricultural
markets.
Drought will
cause
supply to
decrease.
Good
growing
conditions
can cause
supply to
increase.