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.
In a Market economy: What to produce is determined by?
Consumer preference
In a Market economy: Who to produce for is determined by?
Whoever has the greatest purchasing power in the economy, and is therefore able to buy the good/service
In a Market economy: How to produce it is determined by?
Producer’s seeking profit
What are the advantages of a Market economy?
Firms are likely to be efficient because they have to provide goods and services demanded by consumers.
Firms are also likely to lower their average costs and make better use of scarce resources so as to profit maximise (and meet other objectives).
Therefore, overall output of the economy increases (economic growth).
The bureaucracy from government intervention is avoided - increasing efficiency.
Some economists might argue the freedom gained from having a free economy leads to more personal freedom.
What are the disadvantages of a Market economy?
The free market ignores inequality, and tends to benefit those who hold most of the wealth.
There are no social security payments for those on low incomes.
There could be monopolies, which could exploit the market by charging higher prices.
There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco.
Public goods are not provided in a free market, such as national defence.
Merit goods, such as education, are under provided.
What is a mixed economy?
An economy in which there is some degree of government intervention and therefore the market is controlled by both the government and the forces of supply and demand (there is a public sector and private sector).
In a Mixed economy: What to produce is determined by?
Both consumer and government preferences
In a Mixed economy: Who to produce for is determined by?
Both the purchasing power of private individuals (and firms), and the government
In a Mixed economy: How to produce is determined by?
Producers making profits and the government
What are the advantages of a Mixed economy?
It might be easier to coordinate resources in times of crises, such as wars.
The government can compensate for market failure, by reallocating resources. This may ensure everyone can access basic necessities - and thus reduce poverty/absolute poverty.
Inequality in society could be reduced, and society might maximise welfare rather than profit.
The abuse of monopoly power could be prevented.
What are the disadvantages of a Mixed economy?
Governments fail, as do markets, and they may not be fully informed for what to produce. They may not necessarily meet consumer preferences.
It limits democracy and personal freedom.
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. It is also referred to as central planning.
In a Planned economy: What to produce is determined by?
The government
In a Planned economy: How to produce it determined by?
The government
