1.2 the allocation of resources Flashcards
(16 cards)
the rationing function
excess demand will lead to rise in price
this is due to the scarcity of a product
price rise leads to reduction of demand
more scarce a product higher the price
the incentive function
higher prices acts as motivator for producers to increase supply
this is due to the greater contribution per unit
as price rises so does revenue and profit
movement along supply curve
the signalling function
increase in price gives indication to producers to increase supply
increase in price gives indication to consumers to reduce demand
all the signals leads to shifts in supply or demand curves
free market
economic system in which prices are determined by unrestricted competition between privately owned businesses.
what’s Adam Smiths theory
a metaphor that describes the unseen forces of self-interest that impact the free market. In theory, consumers basing decisions on self-interest creates a positive outcome for the economy
advantages of free market
competitive market
consumer choice
encourages innovation
economic growth
disadvantages of free market
inequalities of wealth
little regulation
provisions of demerit (deemed bad for society) goods
little control of externalities
role of the government within an economy
provide public goods
control macroeconomic variables
reduce negative externalities
provide legal framework
encourages free trade
whats a command economy
resources including labour are allocated by the government, the state decides what, how and whom to produce
advantages of command economy
greater equality
removal of demerit goods
disadvantages of command economy
no self interest
can lead to poor allocation of resources
can lead to bureaucracy
who is Karl Marx
he believed that labour was exploited by capitalism
what’s a mixed economy
resources are allocated by a combination of both the market mechanism and the government
advantages of mixed economy
greater equality
government role to ensure smooth running
disadvantages of mixed economy
crowding out where gov provide services
gov failure creates a situation where resource allocation reduces welfare
requires government expenditure paid for by the tax payer
define public good
one where its use by an individual does not stop others from using it.
its consumption does not reduce the amount available for consumption by others
