2.2 The role of markets in allocating resources

Question 1

What is an Economic System?

Answer 1

Economic system is the way a country decides :-
What to produce,
How to produce and
For Whom to produce.

Question 2

What are the three questions that any economic system must ‘answer’?

Answer 2

1. What to produce ?
   2 How to produce it ?
   3 Who gets the products produced ?

Question 3

Identify and briefly describe the three types of economic systems.

Answer 3

1- Free market economy
This economic system relies on the market forces of demand and supply to allocate resources with minimal government intervention

2- Planned economy
This economy system relies on the government allocating resources

3- Mixed economy
This economy system is a combination of the planned and market economic system, with some resources owned and controlled by the government in the public sector.

Question 4

Market System

1. What to produce ?

2 How to produce it ?

3 Who gets the products produced ?

Answer 4

Market System
1. What to produce ?
Customer decide ( consumer soverignty )

2 How to produce it ?
Producers look for lowest cost methods

3 Who gets the products produced ?
Those who pay get products

Question 5

Mixed System

1. What to produce ?

2 How to produce it ?

3 Who gets the products produced ?

Answer 5

Mixed System

1. What to produce ?
   Combination of Cunsumer soverighty and Government decision

2 How to produce it ?
Producers look for lowest cost methods and Government decision

3 Who gets the products produced ?
Combination of Those who pay get products and Government decision

Question 6

Planned/Command System

1. What to produce ?

2 How to produce it ?

3 Who gets the products produced ?

Answer 6

Planned/Command System

1. What to produce ?
   Government decision

2 How to produce it ?
Government decision

3 Who gets the products produced ?
Government decision

Question 7

Definition/Features of Free Market

Answer 7

1. All resources are privately owned by people and firms.
2. Profit is the main motive of all businesses.
3. There is no government interference in the business activities.
4. Producers are free to produce what they want, how much they want and for whom they want to produce.
5. Consumers are free to choose.
6. Prices are decided by the Price mechanism i.e. the demand and supply of the good/service.

Question 8

Advantages of Free Market

Answer 8

1. Responds quickly to the people’s wants: Thus, firms will produce what people want because it is more profitable whereas anything which is not demanded will be taken out of production.
2. Wide Variety of goods and services: There will be wide variety of goods and services available in the market to suit everybody’s taste.
3. Efficient use of resources encouraged: Profit being the sole motive, will drive the firms to produce goods and services at lower cost and more efficiently. This will lead to firms using latest technology to produce at lower costs.

Question 9

Disadvantages of Free Market

Answer 9

1. Unemployment:
   Businesses in the market economy will only employ those factors of production which will be profitable and thus we may find a lot of unemployment as more machines and less labour will be used to cut cost.
2. Certain goods and services may not be provided: There may be certain goods which might not be provided for by the Market economy. Those which people might want to use but don’t want to pay may not be available because the firms may not find it profitable to produce. For example, Public goods, such as, street lighting.
3. Consumption of harmful goods may be encouraged:
   Free market economy might find it profitable to provide goods which are in demand and ignore the fact that they might be harmful for the society.
4. Ignore Social cost:
   In the desire to maximise profits businesses might not consider the social effects of their actions.

Question 10

Definition/Features of Planned Market

For example:-
•	 North Korea
•	Cuba
•	Turkmenistan
•	Myanmar
•	Belarus
•	Laos
•	Libya
•	Iran

Answer 10

1. All resources are owned and managed by the government.
2. There is no Consumer or producer sovereignty.
3. The market forces are not allowed to set the price of the goods and services.
4. Profit in not the main objective, instead the government aims to provide goods and services to everybody.
5. Government decides what to produce, how much to produce and for whom to produce.

Question 11

Advantages of Planned Market

Answer 11

1. Prices are kept under control and thus everybody can afford to consume goods and services.
2. There is less inequality of wealth.
3. There is no duplication as the allocation of resources is centrally planned.
4. Low level of unemployment as the government aims to provide employment to everybody.
5. Elimination of waste resulting from competition between firms.

Question 12

Disadvanates of Planned Market

Answer 12

1. Consumers cannot choose and only those goods and services are produced which are decided by the government.
2. Lack of profit motive may lead to firms being inefficient.
3. Lot of time and money is wasted in communicating instructions from the government to the firms.