5) Economic Systems - MB Flashcards
Economic Systems:
what is a resource allocation?
the way in which a society’s productive assets are deployed across their alternative uses
Economic Systems:
what is market economy?
market forces are allowed to guide the allocation of resources within a society
Economic Systems:
what is centrally planned economy?
the government guides resources allocation within a society
Economic Systems:
what is mixed economy?
a combination of market forces and government intervention guides the allocation of resources within a society
Economic Systems:
what is capitalism?
a system of production in which there is private ownership of productive resources, and individuals are free to pursue their objectives within minimal interference from the government
Economic Systems:
what is the invisible hand?
term used by Adam Smith to describe the way in which resources are allocated in a market economy
Economic Systems:
what is GDP (basic definition):
the value of all final goods and services produced in a country in a year
Economic Systems:
order these countries from Centrally Planned Economy to Mixed Economy to Market Economy:
- USA
- China
- France
- North Korea
- Taiwan
North Korea (CP), France (M), UK (M), USA (M/M), China (M/M), Taiwan (M)
Economic Systems:
what do economic agents try to maximize?
if rational, try to maximize their achievement of their objectives
Economic Systems:
what do incentives do?
shape the trade-offs economic agents face
Economic Systems:
why do we need Economic Systems?
Society faces a coordination problem for resource allocation, how do we decide which economic agent should get which resources?
Economic Systems:
how does the invisible hand actually work in a market economy?
- Prices act as signals, and incentives for economic agents
- Consumers express their preferences by buying (or not) at current prices
- This acts as a signal to firms given their incentive of profit, which is linked to price.
- The invisible hand guides firms in their decision making and solves the coordination problem
- In such a capitalist system, the government must ensure property rights are respected
Economic Systems:
how does a centrally planned economy work?
the government coordinates production by allocating resources to their uses
Economic Systems:
how does a mixed economy work?
(Most countries operate a mixed economy_
prices provide signals to firms and consumers, but the government intervenes with regulation, taxes and spending
Economic Systems:
what are the advantages of market economy (2 things)?
- Households and firms can use all their income and profit to achieve their objectives
- The invisible hand guides decision making by households to provide labour and firms to made goods and services, leading to efficient use of scarce resources
Economic Systems:
what are the advantages of centrally planned economy?
the government can ensure strategically important areas get the resources they need, e.g. defence
Economic Systems:
what are the are the advantages of mixed economy? (2 things)
- advantages of both market economy and centrally planned economy
- can limit issues caused by market economy overproviding some goods and services, and underproviding others
Economic Systems:
what are the disadvantages of market economy?
- overprovides some goods and services, and underprovides others
Economic Systems:
what are the disadvantages of centrally planned economy?
the complexity of modern economies, and the logistics required, seems to make the coordination problem unsolvable by centrally planned economy
Economic Systems:
what are the disadvantages of mixed economy?
taxes limit ability of households and firms to meet their objectives
Economic Systems:
which is better, market economy, mixed economy or centrally planned economy?
- mixed economy offer enormous advantages over market economies and centrally planned economies.
- the disagreement between countries is not whether government should intervene in markets to address issues, but the EXTENT to which it should intervene
