1.2 The allocation of resources

Question 1

What are incentives?

Answer 1

Something that encourages a person or organization to do/achieve something

Question 2

What’s the incentive to entrepreneurs?

Answer 2

The incentive for taking risks is profit

Question 3

What are free market economies? Including adv. and disadv.

Answer 3

Laissez-faire economies; governments leave markets to their own devices so they allocate scarce resources themselves.
Adv: Firms are likely to be efficient
Disadv: They ignore inequality, usually benefit those with wealth

Question 4

What are command economies? Including adv. and disadv.

Answer 4

The government allocates all of the scarce resources in an economy
Adv: Easier to coordinate resources in times of crises, such as war
Disadv: Limits democracy and personal freedom

Question 5

What are mixed economies? Including adv. and disadv.

Answer 5

Both planned and command economies
Adv: Equality
Disadv: Power struggle (conflict of power)

Question 6

What are the two types of efficiency?

Answer 6

Allocative and productive

Question 7

What is productive efficiency?

Answer 7

Producing goods and services at the lowest possible average total cost

Question 8

What is allocative efficiency?

Answer 8

The right amount of products and services are produced, maximising consumer satisfacton

Question 9

What is economic efficiency and inefficiency?

Answer 9

When a market is both productive and allocatively efficient. Economic inefficiency being when efficiency is not achieved