IGCSE Economics – The Role of Markets in Allocating Resources
The allocation of resources – The role of markets in allocating resources
Objective
By the end of this lesson students will be able to give clear examples of different types of markets and explain how they help allocate resources efficiently in an economy.
Key Concepts
Markets are mechanisms where buyers and sellers interact.
Through the price system, markets signal scarcity and guide the allocation of resources.
Different markets deal with different goods and services: product markets, factor markets, and financial markets.
Examples of Markets
1. Product Markets
These markets involve the buying and selling of final goods and services that households consume.
Retail grocery stores – allocate food resources.
Automobile dealerships – allocate transport equipment.
Online streaming services – allocate entertainment content.
2. Factor Markets
Factor markets deal with the resources used to produce goods and services: labour, land, capital and entrepreneurship.
Labour market – firms hire workers; wages signal the relative scarcity of skills.
Land market – rent determines the allocation of agricultural or commercial land.
Capital market – firms obtain machinery and equipment; interest rates guide investment decisions.
3. Financial Markets
Financial markets facilitate the flow of money between savers and borrowers, influencing investment and consumption.
Stock market – allocates ownership of companies to investors.
Bond market – allocates long‑term financing for governments and corporations.
Foreign exchange market – allocates foreign currency for international trade.
Comparison of Market Types
Market Type
Primary Commodity
Key Participants
Typical Price Indicator
Product Market
Final goods & services
Consumers, retailers, producers
Retail price
Labour (Factor) Market
Labour services
Employees, employers
Wage rate
Land (Factor) Market
Physical space & natural resources
Landlords, tenants, developers
Rent / lease rate
Capital (Factor) Market
Machinery, equipment, buildings
Investors, firms
Interest rate
Financial Market
Money, securities, foreign currency
Savers, borrowers, investors, governments
Interest rate, share price, exchange rate
How Markets Allocate Resources
Consumers express preferences through willingness to pay.
Producers respond to price signals by adjusting output.
Resources flow towards uses that generate the highest profit (or utility).
If demand rises, prices increase, attracting more supply and encouraging entry of new firms.
If supply exceeds demand, prices fall, signalling producers to reduce output or exit the market.
Suggested Diagram
Suggested diagram: Supply and demand curves in a product market showing how price changes allocate resources between producers and consumers.
Key Take‑aways
Markets use prices to communicate information about scarcity and preferences.
Different markets allocate different types of resources, but all rely on the interaction of buyers and sellers.
Understanding market examples helps students analyse real‑world economic issues such as unemployment, inflation, and investment.