1.2 - allocation of resources Flashcards
Allocation of resources
What is an incentive?
Something which motivates / encourages someone to do something or engage in a particular action.
What do incentives lead to?
Greater allocation of resources
Greater profits
Free market economy
Market forces guide the allocation of resources
Consumers demand products
Capitalism
E.G New Zealand
Strengths of a free market economy
Resources used efficiently
Encourages innovation and risks
Greater consumer choice
Invisible hand left to decisions - quicker.
Disadvantages of a free market economy
Inequalities of wealth
G + S that are needed may not be profitable and will not be produced (medicine e.g)
Successful businesses may lead to monopolies.
Centrally planned economy
Governments make decisions
State owns means of production
Businesses given targets for production
Citizens are employed and paid by gov
Products sold by state
Prices set by gov
Communism
E.G North Korea
Strengths of a CPE
Little inequality of wealth
G + S that are vital are provided
No chance of monopolies
No wasteful duplication of resources (no competition)
Weaknesses of a CPE
No innovation or risks
Little competition - less consumer choice
Slower decision making
Mixed economy
Part of the economy is left to the free market, and part is managed by the government.
E.G USA + UK
Strengths of a mixed economy
Incentives to be efficient
Limits government interference
Reduces market failure
A degree of equality
Weaknesses of a mixed economy
Too much equality?
Government failure
Allocative Efficiency
Optimal distribution of goods and services
Where Price = MC (D=S)
Productive Efficiency
Producing maximum output at minimum costs
Lowest point on AC curve
X-Efficiency
Efficiency maintained by firms operating under imperfect conditions
Causes of X-Efficiency
Lack of competition
Satisficing profit
Rising Labour costs
Patents
