Allocation of scarce resources

In capitalist economy most of goods and services are allocated by market price. Those who are willing and able to buy goods and services buy them. The economy is called a market economy.

A command economy – resources allocation is determined under a certain authority. Used in centrally-planned economies, in some firms and in the military.

Majority rule – governmental policies such as taxation and transfer payments are examples of that type of resources allocation.

Other ways: allocation based on personal characteristics, religion, sex.

18. Market equilibrium altering and price setting

Market is said to be in equilibrium if the production level and price level are both defined by a behavior of the market. Demand meets supply.

Some variations are possible. For instance, the government decides to introduce price ceiling (price is below the equilibrium level, shortage is the result), or price floor (price is above the equilibrium, surplus).

There may also be quotas, which prescribe a certain level of production. All the changes are clearly displayed on a demand-supply model.

19. Use of supply-and-demand model.

In Microeconomics demand-supply model allows companies to define level of production and corresponding to it price level, or other way around.

Demand and supply have also been generalized to explain macroeconomic variables in a market economy, including the quantity of total output and the general price level. The Aggregate Demand-Aggregate Supply model may be the most direct application of supply and demand to macroeconomics.

Demand and supply are also used in macroeconomic theory to relate money supply and money demand to interest rates, and to relate labor supply and labor demand to wage rates.

Date: 2015-02-03; view: 752