1.2 THE ALLOCATION OF RESOURCES Flashcards
1
Q
the rationing function
A
- excess demand will lead to rise in price
- this is due to the scarcity of a product
- price rise leads to reduction of demand
- more scarce a product higher the price
2
Q
the incentive function
A
- higher prices acts as motivator for producers to increase supply
- this is due to the greater contribution per unit
- as price rises so does revenue and profit
- movement along supply curve
3
Q
the signalling function
A
- increase in price gives indication to producers to increase supply
- increase in price gives indication to consumers to reduce demand
- all the signals leads to shifts in supply or demand curves
4
Q
free market
A
economic system in which prices are determined by unrestricted competition between privately owned businesses.
5
Q
what’s Adam Smiths theory
A
a metaphor that describes the unseen forces of self-interest that impact the free market. In theory, consumers basing decisions on self-interest creates a positive outcome for the economy
6
Q
advantages of free market
A
- competitive market
- consumer choice
- encourages innovation
- economic growth
7
Q
disadvantages of free market
A
- inequalities of wealth
- little regulation
- provisions of demerit (deemed bad for society) goods
- little control of externalities
8
Q
role of the government within an economy
A
- provide public goods
- control macroeconomic variables
- reduce negative externalities
- provide legal framework
- encourages free trade
9
Q
whats a command economy
A
- resources including labour are allocated by the government, the state decides what, how and whom to produce
10
Q
advantages of command economy
A
- greater equality
- removal of demerit goods
11
Q
disadvantages of command economy
A
- no self interest
- can lead to poor allocation of resources
- can lead to bureaucracy
12
Q
who is Karl Marx
A
he believed that labour was exploited by capitalism
13
Q
what’s a mixed economy
A
- resources are allocated by a combination of both the market mechanism and the government
14
Q
advantages of mixed economy
A
- greater equality
- government role to ensure smooth running
15
Q
disadvantages of mixed economy
A
- crowding out where gov provide services
- gov failure creates a situation where resource allocation reduces welfare
- requires government expenditure paid for by the tax payer
