How Economies Differ Flashcards
What is an economic system?
A method of organising resources in order to answer the key economic questions and achieve improvements in quality of life
Explain who makes the decisions in a pure market economy
All major economic decisions are made by individuals and private firms motivated by self-interest
Explain who makes decisions in a pure planned economy
Government planners make economic decisions and there is little scope for individual choice to influence the economy
What is a product market?
The interaction of demand for and supply of the outputs of production - goods and services
What is the price mechanism?
The process where the forces of supply and demand interact to determine the market price at which goods and services are sold as well as the quantity produced
What is a factor market?
A factor market is a market for any input into the production process including natural resources, labour, capital and enterprise
Explain the characteristics of a market economy (x5)
The market system - factor and product market
Private ownership of property - individuals have the right to own their means of production and can use these to acquire income and wealth
Consumer sovereignty - consumers are free to choose how they will spend their income in order to satisfy their wants
Freedom of enterprise - Individuals have the right to use their resources as they choose
Competition - The force that allows the price mechanism to work effectively
What is Consumer sovereignty?
Where consumers collectively determine what is produced and the quantity of production through market demand
Mixed economy
An economy where the decisions concerning production and distribution are made by a combination of market forces and government decisions
Government interventions (x2)
Social welfare payments - issued to those who do not contribute to the production process.
Progressive income tax - used by the government to create a more equitable distribution of produced output
Why governments intervene in the market economy (x3)
Resource allocation - to provide important goods and services that would not otherwise be provided by the private sector and to restrict production of harmful goods
Income distribution - to create a fairer society and to look after people
Economic stability - to smooth out sharp fluctuations in the economic cycle and to ensure stability in the economy and the financial system
Australia’s mixed economy: Market forces (x4) and government intervention (x4)
Market forces
- Private property
- Free enterprise
- Consumer sovereignty
- Competition
Government intervention
- Public ownership
- Regulation
- Social welfare payments
- Progressive taxation
Government intervention to solve the economic issue of what to produce (x3)
- Act as a producer providing collective goods
- Encourage production through subsidies, tax incentives or funding
- Discourage or prohibit undesirable goods
Government intervention to solve the economic issue of how much to produce (x3)
- Limit production through licensing
- Encourage greater production of merit goods through funding
- Implement protection policies to increase domestic production
Government intervention to solve the economic issue of how to produce
- Influence the costs of the factors of production e.g. labour laws and legal requirements
