1. AQA E CON 1: M ARKETS AND MARKET FAILURE 1.1.4 Scarcity, choice and the allocation of resources Use economic terminology to explain the concept of scarcity. What is the basic economic problem?

2. 1.1.4 W HAT YOU NEED TO KNOW  Candidates should appreciate that the choices made to deal with the problem of scarcity affect the allocation of resources  They should understand the role of incentives in influencing choices  Candidates should understand that the environment is an example of a scarce resource, which is affected by economic decisions

3. T HE NATURE OF A COMPETITIVE MARKET  A market is where buyers and sellers come together to exchange goods and services, normally at a price  A competitive market is where buyers and sellers have no influence on the price set for products  Buyers demand products  Sellers supply products  Goods are physical or tangible, you can touch them e.g. a jumper  Services are non-physical or intangible, you can’t touch them e.g. insurance A product is either a good or a service. French Economist Antoine Augustin Cournot (1801-1877) was the first person to graphically represent supply and demand curves. English Economist Alfred Marshall (1842-1924) later popularised demand and supply theory. His book the Principles of Economics, written in 1890, is a landmark in Economics literature.

4. T HE ROLE OF MARKETS IN ALLOCATING SCARCE RESOURCES  In most economies markets are used to allocate scarce resources through the price mechanism  If price is set too high a firm may not be able to sell all of its goods and services  If price is set too low a firm will lose out on revenue  This gives a signal to a firm as to what price to charge for the scarce resources that it sells Should markets be left to allow the price mechanism to determine prices or should the Government intervene?

5. T HE CHOICES MADE TO DEAL WITH THE PROBLEM OF SCARCITY AFFECT THE ALLOCATION OF RESOURCES  There are alternative uses for economic resources  As wants are infinite but resources limited we must decide how to distribute or allocate these resources  Any choice made will affect how we allocate the resources available  We use the price mechanism to help us allocate these scarce resources

6. A LLOCATION OF RESOURCES IN A COMPETITIVE MARKET  Competitive markets influence choice  The price mechanism is the medium through which scarce resources are allocated  An increase in demand will see a rise in prices, and vice versa  An increase in supply will see a fall in prices, and vice versa  The price at which demand and supply equal each other is called the equilibrium price

7. O PPORTUNITY COST What do you think is meant by the term opportunity cost? Can you write a definition?

8. O PPORTUNITY COST  Opportunity cost can be defined as the benefit lost of the next best alternative when making a choice  As all resources are scarce we must make choices in order to allocate these resources  There are always competing alternatives when making choices e.g. should I buy a Pepsi or a Fanta  If I buy a Fanta I have lost the benefit of the closest alternative, a Pepsi  There is an opportunity cost for all decisions made by economic units The opportunity cost of HS2. What would you choose?

9. T HE ROLE OF INCENTIVES IN INFLUENCING CHOICES  The price mechanism is the process that allows markets to operate  The rationing function impacts on choice:  Changes in demand and supply lead to changes in price, thus making goods and services more or less attractive  The signalling function impacts on choice:  Changes in price are a signal to consumers and producers as to whether to leave or enter a market  The incentive function impacts on choice:  Consumers and producers are motivated to a certain course of action i.e. buying and selling dependent on whether price is rising or falling As seen in 1.1.1 economic incentives are the reasons for economic agents providing goods and services. They also inform consumers when demanding goods and services. In pairs explain how each function can influence choice.

10. E CONOMIC DECISIONS AFFECT THE ENVIRONMENT AS A SCARCE RESOURCE  Land is an essential element in the production of goods and services  Unfortunately, the production process can exploit land to the detriment of the environment  Exploitation of land has lead to serious environmental problems:  Resource depletion as non-renewable resources are being exploited that can never be used again  Resource degradation as the use of resources impacts negatively on the quality of life e.g. pollution and the destruction of habitat, wildlife and cultures on a global scale  Decisions made by economic agents can therefore create serious costs to society  However, effective economics can benefit society by redressing these problems The environment is the surroundings in which we live. It includes man-made as well as natural resources. Economic activity has a major impact on the environment. Can we really measure the cost of economic activity?

11. Q UICK TEST  Which of the following is an accurate definition of opportunity cost? a) The cost of resources used to meet demand b) The cost of one option in terms of the next best option foregone c) The cost of advantages offered through specialisation d) The cost of combining the factors of production to start a new business Can you explain your answer?

12. T EST YOURSELF 1. Explain how the price mechanism is used to allocate scarce resources. 2. Explain why buying a bottle of water has an opportunity cost. 3. Why is the environment an example of a scarce resource?