Market Economy Principles

The Basic Economic Problem

• Too few resources are available to fulfil all consumer needs and wants.
• Unlimited wants with limited resources causes scarcity and the basic economic problem.

Economic and Free Goods

• Economic goods require resources for production, have scarcity, and have an opportunity cost.
• Free goods are not scarce and available in abundance (e.g., air).

The Factors of Production

• Consumers need and want goods and services.
• Resources are utilized to create goods and services.
• LLCE: Land, Labour, Capital, and Enterprise
• Land: natural resources (e.g., land).
• Labour: human resources (e.g., workers).
• Capital: manufactured resources (e.g., tractor).
• Enterprise: skills and willingness to organize production activities.
• Entrepreneurs organize and combine resources in firms and creates goods and services.
• Durable consumer goods last a long time (e.g., furniture)
• non-durable consumer goods do not (e.g., food).
• Capital goods or semi-finished goods/components are employed during production.

Rewards for Factors of Production

• Land earns rent.
• Labour earns wages.
• Capital earns interest.
• Enterprise earns profits.

Mobility of Factors

• Mobility refers to ease of movement between production areas.
• Geographical Mobility: willingness/ability to relocate for employment.
• Reasons for unwillingness to relocate includes family ties and cost of living.
• Occupational Mobility: ease of changing jobs, varies with cost, training, and education.

Changes in the Quantity or the Quality of Factors of Production

• Factors of production affects quality and quantity.
• Cost (labour and raw materials costs).
• Government Policies (taxes and subsidies).
• New Technology.
• Migration of Labour.
• Improved Health care and Education.
• Weather Conditions (agriculture).

Opportunity Cost

• Opportunity cost is the value of the next best alternative when choosing resource uses.
• Choosing one use means giving up the use of resources elsewhere.
• Resource allocation involves choosing how best to use limited resources to maximize economic welfare.
• Problem of resource allocation helps establish efficiency.
• Economics aims to find the most efficient resource allocation.

Examples of Opportunity Cost

• A person invests $10,000 in stock, losing potential interest they could have earned in a bank account.
• A city decides to build a hospital, foregoing the benefits of a school or sports center.

Production Possibility Curves (PPC) Diagrams

• PPC is production possibility curve.
• PPC shows maximum combinations of two goods/services an economy can produce with limited resources.
• Each combination on the curve represents a choice.
• An economy cannot have unemployment to be on the PPC.
• A point inside the curve signifies inefficiency.
• A point outside is unattainable due to lack of resources.

Movement in PPC and Shift of PPC

• PPC movement occurs when resources are moved from one area to another. Shifting the PPC occurs when the PPC line is moved.
• Better availability of resources causes an outward shift.
• Decrement in resources causes an inward shift.

The Allocation of Resources

Microeconomics and Macroeconomics

Microeconomics

• The study of specific markets and segments of the economy
• Involves individual consumer behavior and individual labor markets.
• Example: A consumer considers options when buying a product.

Macroeconomics

• Study of the whole economy, looking at aggregate variables.
• Involves decisions by the government regarding policies.
• Example: Governments deciding on tax rates.

The Role of Markets in Allocating Resources

• Market economy: economic decisions and pricing of goods/services are guided by interactions of supply and demand.

Key Resources Allocation Decisions

• The basic economic problem of scarcity poses three key questions
• What to produce?
• How to produce?
• For whom to produce?

Introduction to the Price Mechanism

• Price mechanism aids the resource allocation decision-making process using economics.
• A decision is made at the equilibrium point where demand and supply meet.

Features of Price Mechanism

• Private Economic Agents can allocate resources without intervention from the government.
• Goods and Services are allocated based on price (Higher price = more supply; Lower price = more demand).
• Allocation of Factors of Production is based on financial returns.
• Competition creates more firms which creates choices and opportunities for consumers and private individuals.

Demand

• Demand is customers willingness and ability to buy a good/service at a given price.
• Price is inversely proportional to the price; higher price means less demand.

Factors That affect Demand

• Price
• Advertising
• Government Policies
• Consumer tastes/preferences
• Consumer Income
• Prices of substitute/ complementary goods
• Interest rates and price of borrowing money
• Consumer population
• Weather
• Individual Demand: demand of sole person or firm
• Market Demand: aggregate of all demands in market

Movement Along The Curve

• A Change in the price of the good or service
  • contraction, point goes upwards
  • extension, point goes downwards.
• The movement can be either contraction or extension.

Shift of the Curve

• Changes in Non-Price factors such as
• tastes,
• prices of substitute goods,
• consumer incomes.

Supply

• Supply is suppliers' ability and willingness to provide goods/services at a given price.
• Price is directly proportional to the price; higher price means more supplied.

Factors that affect Supply

• Factors of Production Costs
• Other Goods/Services Prices
• Global Factors
• Technology Advances
• Business Expectations
• Individual Supply is the supply/ability of an individual producer
• Market Supply is the aggregate ability of all producers
• Price is directly proportional to the supply; lower price means less demand.

Price Determination

• Equilibrium refers to the quantity in which supply and demand are equal.
• At this point, the goods are at their most efficient because the same amount of goods are supplied as there are of demand.

Market Disequilibrium

• Excess supply results if price is higher.
• Excess demand results if price is lower.
• Changes in supply and demand causes price changes

Price Elasticity of Demand (PED)

• Definition: The responsiveness of demand to a change in price.
• Inelastic Demand: PED is lower than 1 , it is either essential or habitual. A price changes has little effect on change in demand.
• Elastic Demand: PED is greater than 1, necessity of the product is relatively low. Demand responds more drastically.
• PED = % change in quantity demanded / % change in price.

Factors that affect PED

• Availability of Substitutes
• Time
• Proportion of Income
• Whether the product is a Necessity

Special Situation with PED

• Perfectly Price Inelastic: Quantity stays the same regardless of price changes
• Perfectly Price Elastic: Any changes in Price leads to quantity demanded being zero
• Unitary Price Elastic: Percentage change in price is directly proportional to that of quantity demanded

Price Elasticity of Supply (PES)

• Definition: The responsiveness of quantity supplied to a change in price.
• Inelastic Supply: PES is less than 1 ; Price increase has little effect on quantity
• Elastic Supply: PES is higher than 1; Price increase has large effect on quantity.

Market Economics System

• Is the economic system that relies on the market forces of demand and supply to allocate market resources with minimal involvement of the government.
• System is run by private firms and individuals.
• Goods and services can be delivered to consumers and others if people are willing and able to pay for them

Market failures include

• Scarce resources being wasted, are inefficient or even harmful to people and others.
• Not enough safety
• Firms will only supply products to consumers with the ability to pay
• Resources will only be provided if it is profitable to do so
• Harmful goods may be readily available to buy

System Attributes

Advantages:

• Wide variety of goods/services, profit motive encourages the development of new and more efficient methods, quick response.
• No taxes on incomes and wealth or others

Disadvantages:

• Serious market failure, only profitable goods are provided, firms will only supply products to consumers.
• Resources are only provided if profitable, people can find and buy harmful goods.
• No taxes on income and wealth.

Market Failure

• Occurs when the market mechanism fails to allocate scarce resources efficiently, so social costs are greater than social benefits.
• formula: Social Costs = Private Costs + External Costs
• Social benefits result in private benefits and external benefits
  • formula: Social Benefits = Private Benefits + External Benefits
• Private Costs are the production and consumption costs of producer, the individual or the government
• Private Benefits are the benefits of producing, consuming, or what the government benefits

Consequences of Market Economic System

• Goods profitable to make will be produced, no public services, people are left unemployed without an income, harmful and monopolistic production.

Mixed Economics System

• Contains private sector and public sector.
• Government corrects market failures through interventions
• Allocate resources to provide goods and services needed
• Introduction of laws and control to hinder actions

Price Controls

Maximum Prices

• Governments set the price below the equilibrium point to make things more affordable, controlling and lowering prices.

Minimum Prices

• Governments controls the price above the equilibrium to encourage the supply of certain goods. This includes the National Minimum Wage.

Government Intervention

• Interventions includes
  • helping the needy gain access to the right resources
  • offering public goods
• Public sector could employ those in need instead of welfare benefits, laws and regulations to reduce consumption.
• Monopolies can be regulated by keeping prices low, illegal goods or high taxes can reduce consumption, regulations to protect, and natural environment
• To protect natural resources and hinder waste

Influences on Spending, Saving and Borrowing

• Disposable income: amount of income left to spend or save after direct taxes have been deducted
• Spending enables to buy and fulfil to satisfy needs and wants
• Saving involves delaying consumption, as savings are needed more
• Borrowing allows one to invest in goods that will provide money.
• People with low disposable incomes may spend more to afford the basic needs and invest in long-term products
• People tend to spend all or most of their income meeting their basic needs

Factors that influence the choice of occupational

• level of challenge
• career prospects
• level of danger
• length of training required
• level of experience

Explore the principles of a market economy, including supply and demand, resource allocation, and price elasticity. Understand how these concepts drive economic decisions and affect revenue. Learn about market equilibrium and the role of private actors in resource allocation.