Economics Grade 9IG

UNIT 6 THE ROLE OF

MARKETS IN ALLOCATING
RESOURCES
Aim:
• Explain the key allocation decisions
• Describe the nature of the market system
• Analyze how the price mechanism provides answers to the key
allocation decisions
6.1 The Three Key Allocation
Decisions
Allocative Decisions:
Economies are changing and therefore ask themselves the
following three questions from time to time:
1. What to produce?
2. How to produce it?
3. For whom to produce?
The Three Key Allocation Decisions
Firms have to decide what to produce because of scarcity –
infinite wants but finite resources. So, with the given resources,
they can only choose to produce a certain amount of products
Firms also have to decide how to produce – they can either
employ more labor, or they can use more capital goods in the
production process.
The answers to the above questions differ in different economic
systems.
An economic system covers the institutions, organizations, and
mechanisms in a country that influence economic behavior and
determine how resources are allocated.
6.2 Different Economic Systems
There are three main economic systems:
 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.
 Mixed Economic System – an economy in which both the
private and public sectors play an important 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.
6.3 A Market Economic System
In a market economy, consumers determine what is produced by
signaling their preferences through the price mechanism.
Private firms decide how to produce, depending on the type of
product. A steel factory might employ more capital equipment, and
therefore its production would be capital-intensive. However, a
hotel might employ more workers for the job, so it would be labor-
intensive production.
In a market economy, those with the highest incomes influence
what is being produced, since they can pay more, and private firms
are always aiming for higher profits.
INDIVIDUAL ACTIVITY 1

Discuss how the following questions are answered in a market

economic system:

a What is produced?
b How is the output produced?
c Who gets the products produced?
6.4 The Role of the Price
Mechanism
In a market economic system, resources move from less popular
products to more popular ones due to demand and supply which is
influenced by consumers and the prices they are willing to pay.
The Role of the Price Mechanism
The allocation of resources continues to change from time to time.
This is due to the consumers’ demand and the cost of production.
It is important to note that market disequilibrium moves to
market equilibrium after changes made in the allocation of
resources.
For example, if the supply of potatoes decreases, consumers will
be willing to pay more for it due to the shortage. Firms’ profits will
increase, so they will produce more of the product, resulting in
more supply of potatoes. In this way, market disequilibrium has
moved to market equilibrium.
 GROUP ACTIVITY 1

In your group, decide in each case which product would be likely to

have the higher price and why:

 The price of a ticket to the football World Cup and a ticket to

a local non-league game
 Gold and rice
 The services of a dentist and the services of a cleaner