The Allocation of Resources

Question 1

how does a market economy attempt to solve the economic problem?

Answer 1

• goods and services are freely exchange through the market.
• an equilibrium price and quantity will be established in the market.
• without the need of government intervention.
• through the interaction of buyers and sellers.

Question 2

how does a mixed economy attempt to solve the economic problem?

Answer 2

-changes in demand and supply bring out changes in price and quantity.
-the Allocation of Resources is therefore determined by the profit motive
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Question 3

what is the primary sector?

Answer 3

the extractive industry where raw materials are mined/collected/grown.

Question 4

what is the secondary sector?

Answer 4

the manufacturing or construction sector where raw materials are turned into goods.

Question 5

what is the tertiary sector?

Answer 5

the service sector of the economy

e.g. education, banking and tourism

Question 6

what is a surplus?

Answer 6

when supply exceeds demand and there are to many products produced for the demand (stuff leftover)

Question 7

what causes an increase in demand?

Answer 7

• rise in income
• rise in price of substitute
• fall in price of complementary good
• fashion

Question 8

what causes an increase in supply?

Answer 8

• fall in cost of production
• a rise in productivity
• a subsidy given by the government
• a fall in tax on the good/service
• rise in pop.

Question 9

what is the value of elastic and inelastic?

Answer 9

INELASTIC DEMAND - less than 1

ELASTIC DEMAND - more than 1

Question 10

why might a good have inelastic demand?

Answer 10

• the lack of available substances
• if the product is a necessity
• if the product is addictive
• whether the purchase can be postponed

Question 11

why might the supply of a good be inelastic?

Answer 11

• long production period(make It difficult to adjust supply quickly)
• inability to store the product
• if there is a shortage of the raw material.

Question 12

what is the calculation to work out PED?

Answer 12

PED = %change in quantity demanded/ % change in price

Question 13

what is the calculation to workout PES?

Answer 13

PES = % change in quantity supplied/ % change in price

Question 14

why is PED useful for a manufacturer for E.g. TVs

Answer 14

• it will give them guidance if they are thinking of changing the price.
• if PED is elastic, a price reduction will increase revenue.
• if PED is inelastic, a price rise will increase revenue

Question 15

how could do knowledge of PES be useful to a business?

Answer 15

PES can affect the ability for a firm to respond to a change in demand and the firm can make their supply more elastic by storing goods.

Question 16

what is market failure?

Answer 16

• misallocation of Resources.
• where some goods might be over/ under- consumed. it also refers to a situation where some goods would not be produced at all.

Question 17

why does market failure occur?

Answer 17

• when markets are inefficient
• the lack of perfect information causes consumers and producers to make a inefficient choices.
• public goods are not provided as private firms are unable to make a profit by providing them.
• there may be a significant difference in income and wealth.

Question 18

advantages of government intervention in market failure

Answer 18

• indirect taxes to discourage consumption of demerit goods.
• subsides to encourage consumption of merit goods.
• regulations to control private producers.

Question 19

what are the limitations of government intervention with market failure.

Answer 19

• consumption of demerit goods might be discouraged, but unlikely to end completely given inelastic demand
• consumption of merit goods might be encouraged, but still a limit to extent of increase in consumption.inteevwntion may lead to inefficient firms being supported by the government.