Chapter 1.2: The three basic economic questions: resource allocation and output/income distribution Flashcards
What/how much to produce?
Questions on the choice to produce what particular goods and in what quantities of such goods to produce.
How to produce?
Choices on what combination of the factors of production and types of technologies are used to produce specific goods and services.
For whom to produce?
Questions on how produced goods and services and income/wealth are distributed.
Resource allocation
Assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives.
Distribution of Income
The way an economy’s total income and wealth is distributed among different individuals or groups, answering the ‘for whom’ question.
Redistribution of Income
The transfer of income and wealth amongst different social groups through social mechanisms.
Free market economies
An ‘ideal type’ of economy based on the market approach to making economic decisions, which involves private sector ownership and decision-making, and price rationing.
Planned economies
An economy where all economic decision-making is carried out by government planning, which involves public sector ownership and non-price rationing.
Mixed economies
An economy that combines the command approach with the market approach to resource ownership, decision-making and rationing.
Rationing
The method used to make resource allocation and output/income distribution decisions.
Public Sector
The parts of the economy that are under the ownership of the government.
Private Sector
The parts of the economy that are under the ownership of private individuals or groups of individuals.
Price rationing
Economic decisions are made using methods on the basis of the price of goods, services and resources.
Non-price rationing
Economic decisions are made using methods that have nothing to do with prices determined in markets.
