1.2 - The allocation of resources Flashcards
What are market economies?
Economies where governments leave markets to their own devices (no government interventions/public sector). The market forces of supply and demand allocate all (scarce) resources.
In a Market economy: What to produce is determined by?
Consumer preference
In a Market economy: Who to produce for is determined by?
Whoever has the greatest purchasing power in the economy, and is therefore able to buy the good/service
In a Market economy: How to produce it is determined by?
Producer’s seeking profit
What are the advantages of a Market economy?
Having multiple businesses competing against one another is likely to lead to lower average costs
Competition between firms can lead to greater efficiency
Firms are more likely to innovate when there is a profit incentive
Therefore, overall output of the economy increases (economic growth).
The bureaucracy from government intervention is avoided - increasing efficiency.
Some economists might argue the freedom gained from having a free economy leads to more personal freedom.
What are the disadvantages of a Market economy?
The free market ignores inequality, and tends to benefit those who hold most of the wealth.
There are no social security payments for those on low incomes.
There could be monopolies, which could exploit the market by charging higher prices.
There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco.
Public goods are not provided in a free market, such as national defence.
Merit goods, such as education, are under provided.
What is a mixed economy?
Combination of market forces and Govt policies that controls the allocation of resources
An economy in which there is some degree of government intervention and therefore the market is controlled by both the government and the forces of supply and demand (there is a public sector and private sector).
In a Mixed economy: What to produce is determined by?
Both consumer and government preferences
In a Mixed economy: Who to produce for is determined by?
Both the purchasing power of private individuals (and firms), and the government
In a Mixed economy: How to produce is determined by?
Producers making profits and the government
What are the advantages of a Mixed economy?
Govt can decide which resources to control
Market forces can be used for goods and services that are considered less important
What are the disadvantages of a Mixed economy?
Governments fail, as do markets, and they may not be fully informed for what to produce. They may not necessarily meet consumer preferences.
It limits democracy and personal freedom.
What is a planned economy?
This is where the government allocates all of the scarce resources in an economy to where they think there is a greater need. It is also referred to as central planning.
In a Planned economy: What to produce is determined by?
The government
In a Planned economy: How to produce it determined by?
The government
In a Planned economy, for whom to produce it for, is determined by?
The government
What are the advantages of a planned economy?
Govt can focus resources on where they are most needed in the economy
Prices can be controlled so that those most in need can access goods and services
Fewer resources are wasted on duplicating goods and services
There can be less inequality of income and wealth
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It might be easier to coordinate resources in times of crises, such as wars.
The government can compensate for market failure, by reallocating resources - this might ensure everyone can access basic necessities.
Inequality in society could be reduced, and society might maximise welfare rather than profit.
The abuse of monopoly power can be prevented.
What are the disadvantages of a planned economy?
Government failure, as they may not be fully informed for what to produce.
Consumer preferences and allocative efficiency may not be met.
Limits democracy and personal freedom.
What is the idea of Marginal Utility?
The additional utility gained from consuming an extra unit of a good or service.
What is the law of diminishing marginal utility?
Is the reason for why the demand curve slopes downwards. It suggests that consumer surplus generally declines with extra units consumed. This is because the extra unit generates less utility than the one already consumed. Therefore, consumers are willing to pay less for extra units.
What do economic agents respond to?
Incentives.
What happens when incentives are not used correctly?
Resources are misallocated
What do prices in market economies provide?
Signals to buyers and sellers, which is an incentive to purchase or sell the good or service.
What are economic agents assumed to be?
Rational
