1.2 resource allocation

Question 1

what is a market economy?- what?how?for whom?

Answer 1

governments leave markets to their own devices so the market forces of supply and demand allocate scarce resources.
economic decisions are taken by private firms and private individuals own everything.
what?- consumer preferences
how?- seek profits
for whom? - whoever has the greatest purchasing power

Question 2

what are the advantages of a market economy?

Answer 2

*firms likely to be efficient - x-efficency and productive efficiency
*government failure avoided
*personal freedom
*allocativley efficient s=d, so less shortages and surpluses.

Question 3

what are the disadvantages of a market economy?

Answer 3

*ignores inequality- benefit the wealthy and no security for low incomes
*monopolies exploiting the market
*overconsumption of demerit goods and negative externalities
*underconsumption of merit goods and positive externalities
*public goods not provided

Question 4

what is a planned economy?

Answer 4

the government allocates all resources to where they think is greater need
what?-what the government prefers
how?-governments and employees
for whom?-who the government prefers

Question 5

what are the advantages of a planned economy?

Answer 5

*easy to coordinate resources in times of crisis
*gov can compensate for market failure
*inequality can be reduced as society may aim to maximise welfare.

Question 6

what are the disadvantages of a planned economy?

Answer 6

*governments fail as they may not have full information
*may not meet consumer preferences
*it limits personal freedom

Question 7

what is a mixed economy?

Answer 7

has features of both planned and market economies. there are different balances between command and free economies. the market is controlled by both governments and market forces.
what?- consumers and gov preferences
how?-profits and governments
for whom?- purchasing power and governments

Question 8

what is productive efficiency?

Answer 8

when resources are used to give the maximum possible output at the lowest cost.
when they minimise their average total costs, at the bottom of the AC curve, therefore where MC=AC

Question 9

what is allocative efficiency?

Answer 9

occurs when resources are allocated to the best interests of society where there is maximum welfare and utility.
P=MC, which means that consumers pay for the value of marginal utility they derive.