Economics Essay 2009 Past Paper Jamie Halvorson 1.

. An increasing amount of the worlds scarce resources is being allocated by the price mechanism rather than by State planning. (a) Explain why resources are scarce. 5 (b) Describe how the price mechanism allocates resources. 6 (c) Suggest reasons for the increased use of the price mechanism as a method of allocating resources. 6 (d) Describe some of the problems which can arise from allowing the price mechanism to allocate resources. 8 (25) (a) All resources in the world (except from seawater and the air we breathe) are said to be scarce, this means that they are finite, or in other words will eventually run out. Resources are scarce because they began limited, in the case of gold it was brought to this planet through 100s of millions of years of stars and debris flying about in space, therefore, once it runs out we are not able to create more. Fossil fuels are also scarce; this is because it takes such a long time, exact pressures and materials to create them. Also, the fact that we are using fossil fuels at an astonishing rate adds to the point that they are scarce. Really needed to speak about basic economic problem. Wants are greater than resources available to satisfy wants, therefore everything has an opportunity cost. 2 out of the 5. (b) The price mechanism allocates resources through supply and demand. When supply and demand are equal they are said to be in equilibrium, this is when the correct amount of resources is being allocated to the production of a certain good. If we interfere with the price mechanism and produce too many goods we will see that this good is in surplus, on the other hand if we do not use enough resources according to demand, not enough products will be produced and therefore we will see a shortage of goods. The price mechanism also allocates resources to people who are willing or able to pay the price for that specific resource, if you are not able or willing to pay the price then you cannot use that resource. 2 out of 6. The way to answer this is using a diagram. You would say The price mechanism allocates resources based on the interaction of supply and demand. In Figure 1, we see that price X is the price at which quantity demanded and supplied is equal. Here there will be no surplus or surplus. Any price below the market price will mean that supply is lower than demand leading to a shortage and above the market price, demand is less than supply causing a surplus. Thus, we say the price mechanism is an efficient way of allocating goods and services.

(c) If we let the price mechanism allocate resources, we will see a much fairer and equal spread of resources being used. If the price mechanism allocates the resources we will not see any shortages of resources or surpluses as the market price will be determined by the market alone and will be in equilibrium. If the price mechanism was to be used alone we would see that over pricing or up market pricing would not happen as the market would determine its true worth. In the UK we may see less unemployment as there would be no minimum wage

and employment may possibly be maxed out, due firms being able to afford extra staff. 3 out of 6. The bit I have turned to blue is the opposite of what is true. In fact, a criticism of the price mechanism is that it is only based on ability and willingness to pay so is not available to all. The marks you missed would have been from taking on the idea of allocation being efficient and speaking about scarce resources. In other economic systems like planned economies, there is evidence of high waste in surpluses and low consumer satisfaction due to shortages (queues outside shops). (d) The main problem with allowing the price mechanism to determine the market price is exploitation. If we take the example of the UK work force, a minimum wage was brought in in 1999; this was to stop the exploitation of workers in the UK, meaning that they will be paid a fairer wage. The only problem that comes with this is that there is now a surplus of workers, due to the minimum wage being to high for firms to pay. The price mechanism will also leave out all of the vulnerable people in society, some people may not be able to afford certain goods and the price mechanism will not compensate for this. Instead governments and markets must interfere with the likes of maximum pricing, so that the vulnerable in society get a fair chance. The price mechanism may also benefit the consumer as they it may force firms to sell a good at a much cheaper price than they can actually afford to do. Once again for this reason governments interfere with the market, to make sure that firms also get a fair chance at surviving. Well done. I would say 8 here. 15 out of 25.