1. AS Economics
Allocation of resources in a
competitive market

2. How does the market work?
• You have learnt about demand and
supply, market-clearing prices, excess
supply, excess
demand, disequilibrium…..
• All these put together should move
the market towards equilibrium
• But, how does this actually work?
Can you explain it?
• 10 mins to have a go!

3. Today’s objectives
• Review who the economic
agents are
• Analyse the motives of
economic agents
• Understand the role of prices
in allocating resources

4. and
his

5. Who is he?
What is he famous for?
• Adam Smith!
• In The Wealth of Nations
(1776) Smith argued that an
‘invisible hand’ linked
producers to consumers and
society as a whole
• This meant that the market
mechanism would work
automatically to link buyers
and sellers to resolve the
economic problems of:
• What to produce
• How to produce
• Who to produce it for
• He also argued that freely
operating markets would
work to everyone’s advantage

6. 3 Economic agents, who are
they?

7. The agents and their motives
1. Consumers
2. Producers of goods and services
3. Owners of factors of production

8. The agents and their motives
1. Consumers
Motive is to consume as many products and
services as possible for the minimum outlay
(amount spent)
2. Producers of goods and services
Who will seek to make as much profit as possible
3. Owners of factors of production
Who will sell land, labour, capital and enterprise to
the highest bidder

9. Today’s objectives
• Review who the
economic agents
are
• Analyse the
motives of
economic agents
• Understand the
role of prices in
allocating
resources

10. Smith argued….
It’s all
about
competi
tion!

11. Smith went on….that if each
of these
economic
agents acted
selfishly to
pursue their
own
objectives, th
e market
system would
ensure that
resources
would be used
to produce
those goods
and services
that were

12. and on….
The
starting
point of
all of
this is
the
consume
r…

13. And then…
You have
a go!

14. Over to you

15. Prices have a crucial function in
this. They….
• Ration scarce resources
• Provide incentives to producers
• Signal to producers, consumers and
owners of factors.

16. Rationing
• Consumers have unlimited wants yet
resources are scarce
• If the a resource is relatively scarce and
demand is high the price will be ?
• Supply will be rationed out to those
consumers prepared to pay….?
• On the other hand, is a resource is relatively
plentiful, and demand is low, the price of the
resource will be?
• This ensures that…..?
• Examples?

17. Incentives
• High demand leading to high prices is
an incentive for firms to…?
• Why?
• So therefore, low demand is
associated with low….
• This would act a disincentive to….
• Examples?

18. Signals
• Rising prices indicate to producers
and consumers that…?
• This provides a signal which can help
the decision making of both
producers and consumers.
• Falling prices indicate to producers
and consumers that…?
• Examples

19. Today’s objectives
• Review who the
economic agents
are
• Analyse the
motives of
economic agents
• Understand the
role of prices in
allocating
resources

20. Extra hard question
Why might the market not work?
1. Think about producers
2. Think about consumers