The Allocation of Resources Flashcards
(19 cards)
how does a market economy attempt to solve the economic problem?
- 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.
how does a mixed economy attempt to solve the economic problem?
-changes in demand and supply bring out changes in price and quantity.
-the Allocation of Resources is therefore determined by the profit motive
-
what is the primary sector?
the extractive industry where raw materials are mined/collected/grown.
what is the secondary sector?
the manufacturing or construction sector where raw materials are turned into goods.
what is the tertiary sector?
the service sector of the economy
e.g. education, banking and tourism
what is a surplus?
when supply exceeds demand and there are to many products produced for the demand (stuff leftover)
what causes an increase in demand?
- rise in income
- rise in price of substitute
- fall in price of complementary good
- fashion
what causes an increase in supply?
- 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.
what is the value of elastic and inelastic?
INELASTIC DEMAND - less than 1
ELASTIC DEMAND - more than 1
why might a good have inelastic demand?
- the lack of available substances
- if the product is a necessity
- if the product is addictive
- whether the purchase can be postponed
why might the supply of a good be inelastic?
- long production period(make It difficult to adjust supply quickly)
- inability to store the product
- if there is a shortage of the raw material.
what is the calculation to work out PED?
PED = %change in quantity demanded/ % change in price
what is the calculation to workout PES?
PES = % change in quantity supplied/ % change in price
why is PED useful for a manufacturer for E.g. TVs
- 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
how could do knowledge of PES be useful to a business?
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.
what is market failure?
- 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.
why does market failure occur?
- 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.
advantages of government intervention in market failure
- indirect taxes to discourage consumption of demerit goods.
- subsides to encourage consumption of merit goods.
- regulations to control private producers.
what are the limitations of government intervention with market failure.
- 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.
