. The three key allocation decisions are:
1)What to Produce?
2)How to produce?
3)Whom to produce for?
. The answer to the three questions will influence how you allocate your
resources.
. Economic Systems
1) Planned Economic System- an economic system in which the
government controls and regulates production, distribution, prices,
etc. Resources are allocated by directives.
2) Market Economic System- an economic system where consumers decide what is produced and how resources are allocated by price mechanism. Land and Capital are privately owned.
3) Mixed Economic System- an economy with both private and public
sectors.
. Firms are of 2 types:
1)Capital-intensive - use more capital compared to labour
2)Labour-intensive - use more labour compared to capital.
. Price mechanism refers to the system where the forces of demand and
supply determine the prices of commodities and the changes therein. It is
the buyers and sellers who actually determine the price of a commodity.
Banana
Increase/ Decrease in demand
|
|
Rise in price
|
|
Rise in profit
|
|
Firms produce more
|
|
Hire more FOP
. Market equilibrium moves to disequilibrium and then back.
. Price Mechanism also rations out products if supply falls short of demand.
For eg: If crops get spoiled and supply falls short, the price of the crop will rise until the market is back to equilibrium.
1)What to Produce?
2)How to produce?
3)Whom to produce for?
. The answer to the three questions will influence how you allocate your
resources.
. Economic Systems
1) Planned Economic System- an economic system in which the
government controls and regulates production, distribution, prices,
etc. Resources are allocated by directives.
2) Market Economic System- an economic system where consumers decide what is produced and how resources are allocated by price mechanism. Land and Capital are privately owned.
3) Mixed Economic System- an economy with both private and public
sectors.
. Firms are of 2 types:
1)Capital-intensive - use more capital compared to labour
2)Labour-intensive - use more labour compared to capital.
. Price mechanism refers to the system where the forces of demand and
supply determine the prices of commodities and the changes therein. It is
the buyers and sellers who actually determine the price of a commodity.
Banana
Increase/ Decrease in demand
|
|
Rise in price
|
|
Rise in profit
|
|
Firms produce more
|
|
Hire more FOP
. Market equilibrium moves to disequilibrium and then back.
. Price Mechanism also rations out products if supply falls short of demand.
For eg: If crops get spoiled and supply falls short, the price of the crop will rise until the market is back to equilibrium.