5) Economic Systems - MB

Question 1

Economic Systems:

what is a resource allocation?

Answer 1

the way in which a society’s productive assets are deployed across their alternative uses

Question 2

Economic Systems:

what is market economy?

Answer 2

market forces are allowed to guide the allocation of resources within a society

Question 3

Economic Systems:

what is centrally planned economy?

Answer 3

the government guides resources allocation within a society

Question 4

Economic Systems:

what is mixed economy?

Answer 4

a combination of market forces and government intervention guides the allocation of resources within a society

Question 5

Economic Systems:

what is capitalism?

Answer 5

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

Question 6

Economic Systems:

what is the invisible hand?

Answer 6

term used by Adam Smith to describe the way in which resources are allocated in a market economy

Question 7

Economic Systems:

what is GDP (basic definition):

Answer 7

the value of all final goods and services produced in a country in a year

Question 8

Economic Systems:

order these countries from Centrally Planned Economy to Mixed Economy to Market Economy:

• USA
• China
• France
• North Korea
• Taiwan

Answer 8

North Korea (CP), France (M), UK (M), USA (M/M), China (M/M), Taiwan (M)

Question 9

Economic Systems:

what do economic agents try to maximize?

Answer 9

if rational, try to maximize their achievement of their objectives

Question 10

Economic Systems:

what do incentives do?

Answer 10

shape the trade-offs economic agents face

Question 11

Economic Systems:

why do we need Economic Systems?

Answer 11

Society faces a coordination problem for resource allocation, how do we decide which economic agent should get which resources?

Question 12

Economic Systems:

how does the invisible hand actually work in a market economy?

Answer 12

• 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

Question 13

Economic Systems:

how does a centrally planned economy work?

Answer 13

the government coordinates production by allocating resources to their uses

Question 14

Economic Systems:

how does a mixed economy work?

Answer 14

(Most countries operate a mixed economy_

prices provide signals to firms and consumers, but the government intervenes with regulation, taxes and spending

Question 15

Economic Systems:

what are the advantages of market economy (2 things)?

Answer 15

• 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

Question 16

Economic Systems:

what are the advantages of centrally planned economy?

Answer 16

the government can ensure strategically important areas get the resources they need, e.g. defence

Question 17

Economic Systems:

what are the are the advantages of mixed economy? (2 things)

Answer 17

• advantages of both market economy and centrally planned economy
• can limit issues caused by market economy overproviding some goods and services, and underproviding others

Question 18

Economic Systems:

what are the disadvantages of market economy?

Answer 18

• overprovides some goods and services, and underprovides others

Question 19

Economic Systems:

what are the disadvantages of centrally planned economy?

Answer 19

the complexity of modern economies, and the logistics required, seems to make the coordination problem unsolvable by centrally planned economy

Question 20

Economic Systems:

what are the disadvantages of mixed economy?

Answer 20

taxes limit ability of households and firms to meet their objectives

Question 21

Economic Systems:

which is better, market economy, mixed economy or centrally planned economy?

Answer 21

• 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