1.2 The Allocation of Resources Flashcards
What are market economies?
Economies where governments leave markets to their own devices (no government interventions/public sector). The market forces of supply and demand allocate all (scarce) resources.
What are mixed economies?
Markets that operate freely but with some state intervention.
What is a planned economy?
Economies with no free market, with resources all allocated by the govenrnment.
How does a mixed economy operate?
They are market-based but with some government intervention. This means consumers and producers decide how resources should be allocated most of the time, but in some cases the government will step in (such as in the case of a market failure).
What is a mixed economy often referred to?
Capitalism
How does a planned economy operate?
Associated with communism, the theory is that everyone gets a fair share, but in practice this hasn’t worked for various reasons.
What are the strengths of a market economy?
- Market forces are free to determine the prices of goods and how much to produce
- Firms decide what to make based on consumer demand for goods and services leading to a more efficient allocation of resources
- Consumers have a far greater choice of goods on offer
- More of an incentive for firms to work more efficiently as their profit relies on it
What are some disadvantages of a market economy?
They can create inequality with some becoming wealthy whilst others live in poverty.
What is productive efficiency?
This occurs when an optimal level of of output is produced using all the resources available in the economy.
What is allocative efficiency?
Is about distributing and assigning the resources a frim has available to it in the most effective way to satisfy the demands of consumers.
What makes an economy ‘economically efficient’?
When the economy is both allocatively and productively efficient.
