The lesson
Explain the mechanism, then qualify the outcome. Use this page as a fast, high-quality revision pass—not a wall of notes to memorise.
The economic problem
Scarcity means resources are limited relative to wants. Every choice has an opportunity cost, so an economy must decide how its land, labour, capital and enterprise are allocated.
- Opportunity cost is the next-best alternative forgone.
- The price mechanism uses price changes to signal relative scarcity and influence incentives.
- Allocation is not only about efficiency: governments may also pursue equity, stability or strategic aims.
Market, planned and mixed systems
Most economies are mixed. Markets allocate many goods while governments provide public services, regulate firms and redistribute income.
- Market systems can respond to consumer demand and reward innovation.
- Planned systems may direct resources towards priorities that markets would undersupply.
- Mixed economies need evaluation: intervention can correct failure but can also create costs or weak incentives.
Worked exam thinking
Worked example: a poor harvest
Prompt: How can the price mechanism respond when a poor harvest reduces the supply of coffee?
How to turn knowledge into marks
Use this answer route
For a focused explanation or short evaluation question on this topic:
- 1Define the core idea precisely.
- 2Explain the chain of cause and effect.
- 3Apply it to the context in the question.
- 4Evaluate a limitation, trade-off or condition.
Quick questions
Check your understanding
What is resource allocation?
It is the way scarce resources are distributed between different uses, producers and consumers.
What is a mixed economy?
An economy where markets and government both play important roles in allocation.
Why can the price mechanism fail?
Prices may not reflect external effects, public goods, imperfect information or equity concerns.