O: 2 The allocation of

resources
2.1 Microeconomics and macroeconomics,
2.2 The role of markets in allocating resources
2.1 Microeconomics and
macroeconomics
Microeconomics focuses on individual markets and decisions by individual households and firms.

Microeconomics deals with smaller , discrete economic agents and their reaction to changing
events. For example, it looks at individual consumers and how they make their decisions about
demand and Expenditure; individual firms and how they make decisions, such as what to
produce and how much; and individual industries and how they ay be affected by such things
as government action.
Macroeconomics focuses on the economy as a whole, e.g. it considers the price level for the economy
as a whole, rather than for one market.
Macroeconomics takes a wider view and considers such things as measuring all the economic
activity in the economy, inflation, unemployment, and the distribution of income in the whole
economy.

06/17/2020 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 2

2.2 The role of markets in allocating resources

Allocative Mechanism: an allocative mechanism is a method of taking decisions about the

different uses that can be made of factors of production. A mechanism is needed for economic goods
that are scarce. Free goods in sufficient supply to satisfy demand, such as air or sunshine, do not need
an allocative mechanism.

There are three different types of allocative mechanism:

• market economies
• planned economies
• mixed economies

06/17/2020 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 3

 Different Economic systems

In reality, all economies are mixed to some degree, but vary in the extent to which
the Government intervenes. Since the 1980s the UK Government has reduced its
provision of goods and services (e.g. through privatization) and increased the role of
the private sector. This trend has been followed in many other countries, e.g.
following the decline of Communism in Eastern Europe. UK privatizations include
British Gas and British Telecom. However, in 2008 the UK government nationalised
Northern Rock and Bradford & Bingley banks.

03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 4

 Market Economies
This is where the allocation of resources is left to the market forces of demand and supply
through the operation of the price mechanism
Market Economy (or market system): an economy where decisions about the
allocation of resources are taken through the price mechanism
Market: a way in which buyers and sellers come together to exchange products
Adam Smith: one of the founding fathers of Economics (1723-90) and author of The
Wealth of Nations, published in 1776
• Decision are made by individual buyers and sellers who act in their own self interest;
producers aim to maximize their profit; consumers aim to maximize their utility
• The price mechanism allocates resources

03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 5

 Advantages and Disadvantages
of
Free market Economy
Advantages: Disadvantages:
• Resources are allocated by market • Demerit goods will be over-provide, driven by high
forces and the price mechanism price and thus high profit motive.
(called the Invisible Hand by Adam • Merit goods will be under-provided , since they will
Smith), there is no Government only be produced for those who can afford them
intervention and not for all.
• The profit motive provides an • Resources may be used too quickly and the
incentive to reduce costs and be environment may be damaged by pollution, as
innovative. firms seek to make high profits and to minimize
• The free market maximizes costs.
community surplus if there are no • Some members of the society will not be able to
features and imperfections look after themselves, such as orphans, the sick, and
long term unemployed, and will not survive.
• Large firms may grow and dominate industries,
leading to high prices, a loss of efficiency, and
excessive power.
03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 6
 Planned/ Command Economy
Planned (or command) economy: an economy where decisions about the allocation
of resources are taken by the state

Planned economies, also known as command economies, involve the allocation of scarce
resources through government intervention with no (or very little) scope for marker forces
to operate

• decisions made by central planning agency

• State (government) ownership of resources
• prices set by the State
• motive for production is social welfare
• lack of market forces

03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 7

 Advantages and Disadvantages
of Planned Economy
Advantages : Disadvantages:
• The Government can influence the • Total production, investment, trade, and consumption,
distribution of income to make it more even in a small economy, are too complicated to plan
equal efficiently and there will be misallocation of resources,
• The Government can determine which shortages, and surpluses.
goods are supplied e.g. it can prevent • Because there is no price system in operation, resources
the production of socially undesirable will not be used efficiently. Arbitrary decision will not be
goods) able to make the best use of resources.
• Incentives tend to be distorted. Workers with guaranteed
employment and managers who gain no share of profits
are difficult to motivate. output and/or quality will suffer.
• The dominance of government may lead to a loss of
personal liberty and freedom of choice.
• Governments may not share the same aims as the
majority of the population and yet, by power, may
implement plans that are not popular, or are even
corrupt.
03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 8
 Mixed Economy
Mixed economy: an economy where the allocation of resources is decided both by market forces
and by the state

A mixed economy combines elements of both marker economies and planned economies, i.e. there
is some degree of state ownership and state intervention bur in many areas of the economy marker
forces will be allowed to operate.

lt could be argued that all economies today are, to some extent, mixed economies. However, there are
large differences between, say, China, where the government still plays an important role in the
allocation of resources, and the United States, where the government has only a limited role in rhe
allocation of resources.

03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 9

 Advantages and Disadvantages
of Mixed economy
Advantages: Disadvantages:
1. It Encouragement to Private Sector 1. The mixed economy can leave the less competitive
2. It has Freedom of choices. members of society without support.
3. It ensures optimum Use of Resources 2. It doesn’t eliminate the possibility of monopolies.
4. It has advantages of economic 3. It often produces high taxation responsibilities.
planning. 4. Organizations have restrictions in their overall size.
5. It has lesser Economic Inequalities 5. The state has the power to change its mind in a
6. It has competition and Efficient mixed economy.
Production 6. It encourages people and agencies to go into debt.
7. Social Welfare exist here 7. It can encourage companies to become top-heavy.
8. Economic Development can be 8. It encourages special interest activities.
achieved 9. Private protections don’t need to exist in a mixed
economy.

03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 10

 Problems of transition
Transitional economy: an economy which was previously a command or planned economy
and which is now allowing a greater degree of scope for market forces to operate
A number of economies are going through a period of change where the extent of central
planning is being reduced and marker forces are being allowed to have a greater degree of
influence. China is an example of such a transitional economy. There are, however, possible
problems associated with transition, as Table 3 shows

03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 11

 key resources allocation decisions
Whichever economic system is used, all countries must address three fundamental economic
questions:
1 What production should take place? This question is about deciding which goods and
services should be provided in the economy. For example, is it better for the economy to how more
roads and airports or to have more schools and hospitals? As resources are limited in supply, decision-
makers realise there is an opportunity cost in answering this question.
2 How should production take place? This question is about the methods and processes
used to produce the desired goods and services. For example, decision-makers have to decide which
combination of factors of production should be used in the production process.
3 For whom should production take place? This question is about which economic
agents receive goods and services. For example, should any goods and services be provided free to
everyone in the economy, irrespective of their willingness and ability to pay for these? Or should
goods and services only be produced for those who can pay?

06/17/2020 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 12

 Source / References
1. Cambridge O level Economics
By Susan Grant

2. Edexcel IGCSE Economic

By Rob Jones

3. Economics IGCSE Revision guide

By Brian Titley with Halen Carrier

4. Economics for IGCSE

By Robert Dransfield, Terry cook, Jane King

5. Economics GCSE(9-1)
By Rob Jones

6. Economics for IGCSE and O level

By Moynihan and Titley

03/14/2024 Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies 13