1.2 The Allocation of Resources (not complete)

Question 1

Explain why resources need to be allocated

Answer 1

Since goods are scarce, there is a choice to be made over how to allocate goods more efficiently.

Question 2

Explain the incentives to firms

Answer 2

The incentives for firms is profit. This leads to them driving innovation (R&D) and improving the quality of their products.

When there is a high demand, and a high price of good, this incentivises firms to allocate more resources to producing that good
– This also links to demand pull inflation and monopolistic competition

Question 3

Explain Market Economies

Answer 3

A market economy is where there is no government intervention.
Private individuals own everything.
Resources are allocated according to supply and demand.
Monopolies very easy to form.
Public goods usually provided through government are less apparent.
Very productively and allocatively efficient economy, rarely wastage of scarce resources
High levels of inequality
Merit goods are underprovided whilst demerit goods are over-consumed.
Worker and consumer exploitation - asymmetric information.

Question 4

Explain Centrally Planned Economies

Answer 4

A centrally planned economy is where the government control all elements of the economy, mainly resources.

Easy to compensate for market failure through reallocation of resources.
Basic human rights
No or low levels of inequality
No risk of monopolies

Government & Market Failure
Information failure
Consumer utility not met
Low levels of growth

Question 5

Explain Mixed Economies

Answer 5

An economic system featuring parts of planned and market economies.
The most commonly used system today.
Different balances between planned and markets: US is more free whilst UK is more planned
Market controlled by government and supply & demand
Government production of public & merit goods

Essentially it is the best of both worlds

Question 6

Explain productive efficiency

Answer 6

When resources are used to give the maximum possible output at the lowest possible cost.
Maximises consumer welfare
Located at the lowest point on the minimum efficient scale
Located at the lowest point of the AC curve (MC = AC)

Since resources are used to their maximum potential, other goods may lose out since there is no spare capacity.

Question 7

Explain Allocative Efficiency

Answer 7

Occurs when resources are allocated to the best interest of society
- Maximum social welfare and maximum utility