1.2 The Allocation Of Resources Flashcards
What is resource allocation
This refers to how resources are distributed among producers and how goods and services are distributed among consumers
What are the incentives on economic agents for resource allocation
Economic agents respond to incentives, which can allocate scarce resources to provide the highest utility to each agent.
What is a market economy
Where governments leave markets to their own devices, so the market forced of supply and demand allocate scarce resources
How does a market economy decide what to produce
This is determined by what the consumer prefers
How does a market economy decide how to produce it
Producers seek profits
How does a market economy decide for whom to produce it
Whoever has the greatest purchasing power in the economy, and is therefore able to buy the good
Advantages of market economies
Firms are likely to be efficient because they have to provide goods and services demanded by consumers
The complications from government intervention are avoided
Disadvantages of market economies
It ignores inequality and tends to benefit those who hold most of the wealth
There could be monopolies which exploit the market by charging higher prices
Overconsumption of demerit goods with large negative externalities
Under provision of merit goods such as education
What is a planned economy
This is where the government allocates all of the scarce resources in an economy to where they think there is a greater need
How does a planned economy decide what to produce
Determined by what the government prefers
How does a planned economy decide how to produce it
Governments and their employees
How does a planned economy decide for whom to produce it
Who the government prefers
Advantages of a planned economy
Easier to coordinate resources in times of crisis
Government can compensate for market failure by reallocating resources
Inequality can be reduced
Abuse of monopoly power could be prevented
Disadvantages of a planned economy
Governments may fail as they are not fully informed on what to produce
May not fully meet consumer preferences
Limits democracy and personal freedom
What is a mixed economy
This has features of both planned and market economies and is the most common system.
