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Economic Problem of Scarcity and Resource Allocation


1(a)Explain the economic problem of scarcity and resource allocation, and evaluate the role of opportunity costs in determining how economics make decisions

All the problems which are associated with money are known as economic problem. It is also known as central, basic or fundamental economic problem. It state that there is scarcity that is, the availability of limited resources are not enough to satisfy the need want and demand of the society. So the question is that how to control and what to be produced, and how the capital and labor are utilized to remove this type of problems.

The problems of economics appear mostly with two problems:

  1. Unlimited human wants
  2. Limited resources


Scarcity is one of the most important and basic problem in which human wants are unlimited so it creates difficulties to fulfill the satisfaction of human wants because resources are limited. Thus we have selected one option. We have to make tradeoffs. We have to use our resources with efficiently and well-mannered way. We are bound to do so because resources are limited and demands of our own are unlimited.


Without scarcity, the discipline of economics cannot be presents.

Economic is a field of distribution, production and consumption of goods and services. If the society fails to produce the goods according to the required demand and fail to distribute the goods equally between the societies and didn’t fulfill the wants and demands of humans, then the study of the economic problems become boring.

In case of scarcity not appears, and then the goods and services would be free. Therefore the decision about scarcity would be made.

Allocation resources problems occur due to scarcity of resources and give the answer of the question that what would be satisfied and which should be left unsatisfied. In other words we can say that what to produce and where it is produce and how much it is going to produced? Because production of goods in maximum quantity required more resources and resources are scarce. These two factors are run together if the productions of some products increased then the resources are also being increased because more productions require more resources.

The problem of distribution contracts with the question of whether to products capital goods or customer goods. When the demand of some products are increase then the society take decisions of producing capital goods and the resources withdrawn from the production of consumer goods.

So in that case both the capital and customer goods are significance

1(b)Explain how market equilibrium is achieved

It is the state of the market in which the demand and supply are equal in the market. When the prices of the goods and services are involved in the supply and demand equality state, equilibrium price is achieved. Whenever a market is in the state of equilibrium and the prices of goods and services are not changed unless any external factors changes effect on it, it results in a distraction of the equilibrium.

Market equilibrium can be best define on the help of below example and graphical representation

For Example: let’s suppose the weekly supply and demand program of soft drink in Students at various prices (between 30p and PKR 1.10p) is shown

Price Quantity Demanded Quantity Supplied
1.10 0 1000
1.00 100 900
90 200 800
80 300 700
70 400 600
60 500 500
50 600 400
40 700 300
30 800 200


As it can be seen this market will be in the state of equilibrium at a price of 60p as per soft drink. At this point the demand and supply of soft drinks is to be equal and will be the clear market which means that 500 soft drinks will be presented for sale at the price of 60p and same 500 drinks will be bought that result is no change in demand and supply at price 60.

Price Quantity Demanded Quantity Supplied
1.10 0 1000
1.00 100 900
90 200 800
80 300 700
70 400 600
60 500 500
50 600 400
40 700 300
30 800 200

When the price is higher than equilibrium, supply will be more than 500 but demand will be less than 500 so in the short run there will be an excess of supply.

Graphically we can say that supply extends outwards along with the curve and demand contracts inwards. Such a changes are called movements along the demand or supply curve in reaction to a change in price.

Demands of product contracts due to higher prices therefore the substitution effect and income effect make a chain to dispirit demand as well as when demand extends at lower prices, the substitution and income effect make a chain to boost demand.

In term of supply the supplier’s belief of higher revenue and profits when increase in prices boost up supply therefore increase in price decreses the cost of opportunity for supplying more and vice versa. The cost of opportunity of supply narrates to the probable substitutes of the factors of production. Similarly in the case of a college or university canteen that supplies soft drinks or other products become more or less attractive to supply when the price of soft drinks changes.In response to changes in prices, changes in demand and supply stated to as the signaling and incentive effects of change in price.

If the information passing rapidly between the buyer and seller in the market efficiently, the excess of demand and elimination of supply will be achieved and the markett growth will rapidly accommodate (in the case between students and a college canteen).

Simliarly in the case of supply superfluous, the price will adjust downwards and supply will be reduced by the seller with holding excess stocks. Whereas in the case of surplus demand, the seller will speedily neglect their stock that will generate an increase in price and improved supply. So to create a stable equilibrium price it is necessary and depend on the efficiency of market working and closer to settle the market.

1(c)Assess the importance of elasticity in market interactions

In the market interaction the elasticity is important dimension of how the approachable and economic variable is to a change in to another. Elasticity is one of the most significant concepts in neoclassical economic theory. It is the valuable and consideration in the occurrence of unplanned assessment, negligible conception as they communicate to the theory of the firm distribution of money and different categories of goods as they communicate to the theory of customer excellent. Elasticity is also significantly important in any argument of the money distribution and most important in customer benefit, producer benefit or government benefit.

Elasticity could be calculated as the ratio of the proportion change in one variable to the proportion change in another variable, when the concluding variable has a fundamental influence on the former. Commonly used elasticity eliminates price elasticity; supply elasticity, income elasticity and replacement elasticity between issues of production and elasticity of inter progressive replacement.

Following are some important points which show the importance of elasticity in the market interaction.

International trade

It is important to keep information about the elasticity of demand of goods while exporting of fix price of products.

An organization may fix high prices for the goods with inelastic demand. Thus if the required demand in the importing country is elastic, then exporting country will fix low price.

Decisions of Monopolist:

A monopolist deliberates the environment of demand whereas fixing price of his manufactured goods. If demand on behalf of the manufactured goods is elastic, at that time he will fix low price. But, if demand is inelastic, at that time he is in a situation to fix a high price.

Guideline to the producers

The elasticity concept gives the idea to the manufacturers of advertising the amount to be spent on. In case of elastic in commodity demand, then the manufacturer will have to be consumed more amounts on advertising by increasing the sale.

Help to trade unions

The trade union has the power of increasing the wages of labor where product demand is inelastic. It the demand is relatively elastic then the trade union never force for higher wages.

Importance in taxation policy

As respects its applied benefits, the idea has huge significance in the scope of government finance. When a finance minister levies a tax on an assured product, he has to understand whether the demand for that product is elastic or inelastic.

In case of inelastic in demand he can use his power of increasing the tax and can gather huge amount in the form of revenue. But if the demand is elastic then he is the situation of increasing the tax rate. By doing so the total revenue reduced and demand for commodity is calculated.

1(d)Compare how prices are set in different market structures

An industry compares its products with every one of those by whom its products are identify by nature or match with it and a company’s market strategies and structure reliant of that company which they compete. An organization or a company is confidential into four market structure. These are:

  1. Perfect competition
  2. Monopolistic competition
  3. Oligopoly
  4. Monopoly

Perfect competition

A market structure in which the five following condition are encountered.

  1. All the organizations sell an indistinguishable product.
  2. All the organizations cannot control the price of product into the market.
  3. All the organizations have comparatively minor shares in market.
  4. Consumers know each and every thing about the product price of sale and purchase.
  5. The organizations are categorized by independence of free entry and exit.

Monopolistic competition this situation is created when the manufacturer sell out those products who are totally different from one another. This is also called imperfect competition. In the monopolistic competition an organization ignore the impression of its own price and charge heavy price as compare to its competitors.


Oligopoly has its own market structure in which market industry is controlled by small numbers of suppliers. Oligopoly reduce competition and from numerous competitors and make principal to higher prices from customers.


Monopoly creates in the situation when there is no any other company or any competitor. Actually there is only one company is providing the goods and services to the customers and there is no additional company is available to fulfill the requirements of the customer’s needs and demands.

Comparison of prices sets in different market structures

The pricing strategy is very important in the market structure. This is in a impeccable modest that market will be obvious by the market demand and supply curve of the product in question. The supply curve presents the company’s ability of producing the price. On the perfect competition pricing strategy is show that there is only going to sell products for the consumer on which he demand and pay for it. This is complementary in price and demand. In this situation the perfect competition of market prices would be strong minded by the equilibrium of products and services in the question meaning in that the existent market will establish the price of the product in question. The organization in this situation will be the price taker and fundamentally sole its products on going market strategies. So the producer produces the product at low cost for making high profit.

In a monopolistic competition the market structure is categorized by the company to sell their products at the pricing strategy of a company. May be a product that a company produce it is similar with another but a slit different from another then select a price strategy which may not affected to the market.

As such, the company will effort to advance a modification in their product by using consumer segments, branding, advertising, and personal sales to set their product separately from other similar but different products. Therefore, there are a variety of prices of the different products as an alternative of a single market price. Due to numerous numbers of competitors in the competition of monopolist they have control over the price they have to set for their individual products. A company’s price strategy that is an oligopoly competition market structure is resulted by their straight competitors as strong and complex by pricing for each other.

The company collections of its product price founded on demand. The additional demand, the advanced they can alteration the price but they are thoughtful not to determination the price too in elevation so they won’t interest challengers who would hunger to come into hooked on the marketplace and ambition prices depressed.

1(e)Evaluate the importance of different market systems

As compare to the manufacturing of any goods or providing any services, the marketing system is more important. From the producer point of view, the wholesaler and the consumers are changed. But everyone is interested in his profit. From the manufacturer point of view it is also essential to know that the price in the market allow him to make continue to produce or not. This is also important that what to produce and where it is produce and at what time he should sell it. Customer watches in the market form the point of viewing of his buying power as he is able to purchase the goods or services or not. Wholesaler definitely wants to increase their profit by satisfying different market functions to the customers.

Marketing has larger reputation and significance for the society as a full than for any of the separate receivers complicated in marketing system.

  1. Marketing system brought new ideas and information about quality advantages of goods to customers. It provides relationship between production and consumption.
  2. This system also gives to the manufacturers the useful tools and equipment’s, for the easy use of machines and other implements for taking more benefits etc.
  3. An efficient marketing system outcomes in lower costs of spreading and lower prices to customers, actually transports around an increase in the National Income.
  4. A lower cost of marketing is a straight advantage to the general public.
  5. Marketing system supports in become stable the price level. If manufacturer products what customers demand and customers have a extensive optimal of merchandises around are no variation in price.
  6. Marketing system changes dormant incomes into authentic resources, of requirements into activities and growth of accountability financial privileged and knowledgeable economic countries.
  7. One third of society is involved in the marketing segment and it is expected that one fourth of national income is earned by the profession of marketing.


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