1.4 Resource allocation in different economics systems Flashcards
What is a free market economy? (Example)
An economy in which the resources are allocated solely based on supply and demand
-USA
What are the advantages of a free market economy?
More efficient : due to higher demand from customers, firms are likely to lower prices and make more efficient use of resources
Consumers have more choice as there is more innovation due to profit motive
More personal and political freedom
What are the disadvantages of a free market economy?
It ignores inequality and tends to benefit those who hold most of the wealth.
There could be monopolies which could exploit the market by charging higher prices
There could be overconsumption of demerit goods
Public goods aren’t provided and merit goods are underprovided
What is a planned economy?
A planned economy is which the government allocates all the resources and the price which they will be sold
- everyone receives the same wage regardless of their job
What are the advantages of a planned economy?
It is easier to coordinate resources in a time of crisis
They ensure everyone can access basic necessities
They try to maximise welfare instead of profit
Merit goods are encouraged and demerit goods are rare
What are the disadvantages of a planned economy?
Less motivation and efficiency as people can’t change jobs
Less choice, innovation and lower quality due to the absence of profit motive
Less consumer freedom
State can’t make all the right decisions which would lead to a waste of resources
What is a mixed economy?
An economy in which resources are allocated by the government and by supply and demand. Public and private sectors
What is the role of state in a mixed economy
-Creating a framework of rules
-Stabilising the economy
-Redistribution of income (to ensure there is minimal income inequality)
What is the public sector?
The part of an economy which is controlled or owned by the government
What is the private sector?
The part of an economy which is not controlled or owned by the government.
What is the profit motive?
Firms have the incentive to make profit, they do this by minimising costs and maximising profits
What is competition?
In a market, firms have to meet consumer wants and needs otherwise the consumers may switch to the competitors
