1.2 The Allocation Of Resources

Question 1

What is an economic system ?

Answer 1

an economic system is a set of institutional agreements who’s function is to employ most efficiently scarce resources to meet the ends of society

Question 2

What are the possible economic systems ?

Answer 2

Question 3

When does a market operate freely ?

Answer 3

1. Individual buyers and sellers decide, what, how much, where and when to trade and exchange
2. Individual buyers and sellers trade with reference to their own self-interest and to the alternatives open to them
3. prices convey to the market participants information about self-interest and opportunities

Question 4

What are the 3 functions of market prices ?

Answer 4

1. signalling function - provides clear information to both buyers and sellers about the market conditions
2. incentive function - creates incentives for households and firms to make decisions consistent with meeting objectives based on own self-interest
3. rationing (allocating function) - the price mechanism allocates and rations scarce resources to households and firms who are most willing and able to pay the most in pursuit of self-interest.

Question 5

What is the objective of the consumer ?

Answer 5

An individual derives utility from consumption of goods and services. Consumers are said to be utility maximisers

Question 6

What are the advantages of Free market competition ?

Answer 6

1. A more efficient allocation of resources resources tend to be better allocated in production, as it is more responsive to consumer wants
2. Competition incentivises innovation and invention in markets
3. Competitive prices for consumers, low prices and increased consumption

Question 7

What are the disadvantages of a centrally-planned economy ?

Answer 7

1. Bureaucratic costs of central planning of resources, can lead to inefficiencies and higher average costs of production
2. Relative absence of incentives can damage productivity and can lead to large levels of over-employment
3. Changing consumer needs and wants are not expressed as preferences in the market - the state is slow to react to these

Question 8

What are the advantages of state intervention ?

Answer 8

1. Provide or subsidise the production of, merit goods, such as basics e.g education and healthcare
2. Ensure there is equality in opportunity, by providing accessible eduction of good quality
3. Welfare provision to provide a basic safety net, to reduce poverty
4. progressive tax system and state spending to reduce income inequality.