the allocation of resources Flashcards
resource allocation
how resources are distributed among producers and how goods and services are distributed among consumers
market economy
an economy where the market mechanism allocates resources so consumers make decisions about what is produced.
who makes economic decisions in market economies
economic decisions are taken by private individuals and firms, and private individuals own everything.
there is no government intervention.
adam smith
market economy
- he was a free market economist
- theory of the invisible hand - which can be applied to free market economies and the price mechanism
advantages of market economy
- firms are likely to be efficient - since they have to provide goods and services demanded by consumers.
- likely to lower their average costs and make better use of scarce resources. therefore, overall output of the economy increases.
- the bureaucracy from government intervention is avoided.
disadvantages of market economy
- 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.
- monopolies could exist - which could exploit the market by charging higher prices.
- overconsumption of demerit goods - which have large negative externalities.
- public goods not provided in free market, such as national defence, merit goods, such as education, are underprovided
planned economy
where the government allocates all of the scarce resources in an economy to where they think there is a greater need- central planning
market economy
what,how,whom
what: determined by what the consumer prefers
how: producers seek profits
whom: whoever has the greatest purchasing power in the economy, and is therefore able to buy the good
karl marx
planned economy
- saw free market as unstable
- he saw profits created in the free market as coming from the exploitation of labour, and by not paying workers to cover the value of their work.
planned economy
what,how,whom
what: determined by what the government prefers
how: governments and their employees
whom: who the government prefers
advantages of a planned economy
- easier to bring together resources in times of crises, such as wars.
- government can compensate for market failure, by reallocating resources- might ensure everyone can access basic necessities.
- inequalities in society reduced- society can maximise welfare
- abuse of monopoly power can be prevented
disadvantages of a planned economy
- government fails- may not be fully informed for what to produce
- may not necessarily meet consumer preference
- limits democracy and personal freedom
mixed economy
this has features of both planned and market economies and is the most common economic system today.
who is the mixed economy controlled by?
the market is controlled by both the government and the forces of supply and demand.
governments often provide public goods such as street lights, roads and the police and merit goods
mixed economy
what,how,who
what: determined by both consumer and government preferences
how: determined by producers making profits and the government
who: both the government prefers and the purchasing power of private individuals
