THE

ALLOCATION
OF RESOURCES
Shorts notes for Economics
Muskan
 MICROECONOMICS AND
MACROECONOMICS
What is microeconomics?
Is the study of the economic behavior of individuals and
businesses.

What is macroeconomics?
Is the study of whole economy.

Differences btwn microeconomics & macroeconomics

Microeconomics Macroeconomics
Studies individual units Studies the economy as a
whole
Derived from Greek word Derived from Greek word
‘mikro’ which means small ‘makro’ which means large
Is concerned with single Is concerned with
economic variables. aggregates of an economy.
Is narrow in scope Is wide in scope

Decision makers involved in microeconomics

Consumers
Decide how to use limited incomes to purchase goods and
services that will maximise satisfaction.

Business firms
Decide how to use factors of production to produce goods
and services that will give maximum profit.

Decision makers involved in macroeconomics

The government is the main decision maker. The
government decides how to allocate limited amount of tax
revenue in different areas of spending e.g. education.

THE ROLE OF MARKETS IN ALLOCATING

RESOURCES
What is market?
Market is any set of arrangements that allows producers and
consumers to exchange goods and services

Market system
Market system is an economic system in which all decisions
are taken by private sector organisations and individuals.

Allocation of resources
This is the way resources are put into use to produce goods
and services that consumers mostly want.

Resource allocation in market system

Price mechanism decides how to allocate resources.
In market economy goods and services are freely exchanged
and price act as a guide. If prices are high, suppliers supply
more output in the market. High prices create profits and
increased supply.
The lower the price, the more customers will buy.

Profit motive also decide how resources are allocated.

Resources are utilised to produce goods and services that
yield high profits.
Private sector.
In market economy, resources are allocated by the private
sector. There is no government intervention in the economy.

How price mechanism provides answers to key question

When allocating resources
 What to produce?
Businesses produce goods or services that generate the
highest profit. If consumers want more of a product, they are
often willing to pay higher prices. This increases profit and
so firms produce more of these goods and services.

 How to produce?
Firms need to find a way to produce goods and services at
the lowest cost per unit so that their prices remain
competitive.

 For whom to produce?

Resources will be allocated to produce goods and services
for consumers who are willing and able to pay.

DEMAND
What is demand?
Demand is the willingness and ability to buy a product.

What is effective demand?

Effective demand refers to the desire of consumers to buy a
product, backed up by the ability to pay.

The law of demand

The law of demand states that as the price falls, demand
increases and as price increases, demand falls.

Demand curve
This is a graph plotting the quantities of a product
demanded at different price. All other factors affecting
demand do not change.

Extension and contraction in demand

An extension in demand or increase in quantity demanded
refers to an increase in quantity demanded as a result of a
fall in price.

A contraction in demand or decrease in quantity demanded

refers to a decrease in quantity demanded as a result of a
rise in price.
Y

Shift of the demand curve

A shift in demand curve refers to an increase or decrease in
demand due to change in factors affecting demand other
than price.

Fig. 2: A decrease/fall in demand

Causes of an increase in demand

 An increase in consumers’ income
 A rise in the price of the substitute
 A fall in the price of complements
 Increased advertising of the product
 A rise in the population

Causes of a decrease in demand

 A fall in consumers’ income
 A fall in price of the substitute
 A rise in the price of complements
 Product advertising being cut back or banned
 A fall in the population

SUPPLY
What is supply?
Supply refers to the willingness and ability to sell a product.
The law of supply
The law of supply states that, as the price falls, the quantity
supplied increases and as the price rises, quantity supplied
decreases.
Supply curve
Supply curve is a diagram showing the quantities of a
product supplied at a range prices.

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Extension and contraction in supply
Extension in supply refers to an increase in quantity
supplied due to an increase in the price of a product.

Contraction in supply refers to a decrease in quantity

supplied due to a decrease in the price of a product.
Fig.2: A contraction in supply

Shifts of the supply curve

Shift of the supply curve means an increase or decrease in
the supply due a change in the factors affecting supply other
than price.

Fig.2: A decrease in supply

Factors for rise in supply of a product

 Other products becoming less profitable
 A fall in cost of employing factors of production
 An increase in resources
 Technical progress
 An increase in business optimism and optimistic
expectation of profit
 The government paying subsidies to producers and/or
cutting taxes on profits

Factors for a fall in supply of a product

 Other products becoming more profitable
 A rise in the cost of employing factors of production
 A fall in the availability of resources
 Technical failure
 The government withdrawing subsidies and/or increasing
taxes on profits
 Other factors, such as wars and natural disasters.