Economic Systems

Question 1

What is a Market?

Answer 1

any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services

Question 2

Why are markets important?

Answer 2

Prices act as a signal to potential buyers and sellers

If a firm can’t sell it’s output at the chosen price, this is a signal that consumer demand has fallen

Question 3

Why are barter economics inefficient?

Answer 3

You need to find someone who has what you want and wants what you have = Double Coincidence of Wants

Question 4

What functions does money perform?

Answer 4

Medium of Exchange
Measure of Value
Store of Value
Method of Deferred Payment

Question 5

How is Medium of Exchange a function of money?

Answer 5

Used to buy and sell goods and services

Most important function

Question 6

How is Measure of Value a function of money?

Answer 6

Allows value of goods and services can be compared

Price reflects value society places on them

Question 7

How is Store of Value a function of money?

Answer 7

Nobody would accept money in payment if they did not trust they can use the money for future transactions

Question 8

How is Method of Deferred Payment a function of money?

Answer 8

Money can be used to pay at future date for transactions carried out now

Question 9

What is an economic system?

Answer 9

Complex network of individuals, organisations and institutions and their social and legal interrelationships

Question 10

What is the function of the economic system?

Answer 10

Resolve the basic economic problem

Question 11

What must an economic system determine?

Answer 11

WHAT is to be produced
HOW production is to be organised
FOR WHOM production is to take place

Question 12

What are the main economic actors/agents?

Answer 12

Consumers
Factors owners
Producers
Government

Question 13

What are consumers assumed to want?

Answer 13

Assumed to want to maximise their own economic welfare, utility or satisfaction

Question 14

What are factors owners assumed to want?

Answer 14

Assumed to want to maximise returns

Question 15

What are producers assumed to want?

Answer 15

Assumed to want to maximise profit

Question 16

What are the government assumed to want traditionally?

Answer 16

Assumed to want to maximise social welfare for citizens

Establishes/influences relationships between groups

Question 17

What are the 3 types of economic system?

Answer 17

Free Market
Mixed Economy
Planned Economy

Question 18

What is a Free Market economy?

Answer 18

Economic System where resources are allocated by the price mechanism ie. supply and demand

Question 19

What are most forms of production owned by in a Free Market Economy?

Answer 19

Owned by Private Individuals/Organisations

Question 20

What determines how resources are allocated in a Free Market Economy?

Answer 20

No government intervention

Force of market supply and demand

Question 21

What are consumers/producers/owners of private property motivated by in a Free Market Economy?

Answer 21

Self Interest

Question 22

What are the owners of factors of production and producers free to do in a Free Market?

Answer 22

Buy and sell with few government limits

Question 23

What is the political name for a free market economy?

Answer 23

Capitalism

Question 24

What are the names of two Free Market Economists?

Answer 24

Friedrich Hayek

Adam Smith

Question 25

What did Adam Smith believe?

Answer 25

By pursuing self interest, individuals would be led by 'invisible hand' This would lead to efficient allocation of resources Competition in markets ensures firms produce goods at lowest possible cost Greatest threat to economic growth = government intervention

Question 26

What did Friedrich Hayek believe?

Answer 26

Critical of socialism Governments should not intervene in resource allocation because they are faced with imperfect information Markets are more effective because they rely on people responding to incentives and signals Price mechanism acts as communication network Market will aggregate to decisions and reflect society

Question 27

What is a Command/Planned Economy?

Answer 27

Economic system where government, through planning process, allocate resources in society

Question 28

Who provides jobs for workers in a Planned Economy?

Answer 28

The state

Question 29

Who decides what is produced, how and for whom in a Planned Economy?

Answer 29

The state

Question 30

How does resource allocation work in a Planned Economy?

Answer 30

Market prices play little/no part in informing resource allocation Queuing rations scarce goods

Question 31

What is the political name for a Planned/Command Economy?

Answer 31

Socialism/Communism

Question 32

Who supported the idea of a Planned/Command Economy?

Answer 32

Karl Marx

Question 33

What did Karl Marx think about Capitalism?

Answer 33

Criticised Capitalism Believed small minority (bourgeoisie) who are owners of capital are ruling class The masses (proletariat) who are labourers provide labour to produce goods and services Owner of capitals objective is to make profit and to do this they exploit workers Capitalism's contradictions would lead to it self destructing and revolution among proletariat Private property would be abolished replaced by common ownership of resources

Question 34

What is a Mixed Economy?

Answer 34

Economic System where resources are partly allocated by price mechanism/market and partly by government/state

Question 35

How does resource allocation work in a Mixed Economy?

Answer 35

Markets allocate many resources but government intervene to different extents in order to ensure minimum standard of living and correct market failure

Question 36

What are the different sectors in a Mixed Economy?

Answer 36

Private Sector | Public Sector

Question 37

What is the Private Sector in a Mixed Economy?

Answer 37

Private ownership of factors of production, competition

Question 38

What is the Public Sector in a Mixed Economy?

Answer 38

State owned/run, resources allocated through planning process Governments intervene by raising revenue though taxes and redistributing income through benefits and direct provision of services

Question 39

What are producers/consumers motivated by in a Mixed Economy?

Answer 39

Self interest

Question 40

What are the advantages of a Free Market Economy?

Answer 40

``` Competition (better quality and choice) Lower prices Freedom Profit Motive Customer Need should be met ```

Question 41

What are the disadvantages of a Free Market Economy?

Answer 41

``` Market Failure (some goods wont be provided) Overproduction of negative externalities, underproduction of positive externalities Inequality ```

Question 42

What are the advantages of a Command/Planned economy?

Answer 42

Public services provided Guaranteed jobs for all Equality Guaranteed housing

Question 43

What are the disadvantages of a Command/Planned economy?

Answer 43

Centralised decisions taken by people who may have imperfect information Unable to respond to consumer preferences Governments control peoples lives Bureaucratic (red tape) with decisions held up by planning and committees

Question 44

What are the advantages of a Mixed economy?

Answer 44

``` Competition Freedom Incentives to set up business More equal income distribution (through tax and benefits) Reduces inequality Helps prevent market failure Sets rules, regulations, laws ```

Question 45

What are the disadvantages of a Mixed economy?

Answer 45

Market Failure Inequality Problems associated with government intervention