Allocation of Resources

Question 1

Incentives of Economic Agents

Answer 1

respond to incentives that allocate scarce resources to get the greatest utility for each agent

Question 2

Incentives of and Entreprenuer

Answer 2

Respond to incentives for taking risks.
Entrepreneurs want profit and therefore take the risk of innovation

Question 3

Incentives of Consumers

Answer 3

Respond to the incentive to spend
Consumers can spend more with more money and therefore taking the risk of giving away a scarce resource (money)

Question 4

Incentives of Firms

Answer 4

Respond to the incentive to launch a new product in return for profit and an increase in market share

Question 5

Advantages and Disadvantages of a planned economy

Answer 5

Advantages:

Effective in allocating resources as government try to reduce inequality, leading to an even distribution of resources

Monopoly power is prevented

Disadvantages:

Government do not have full information

They may not meet consumer preferences

Question 6

Advantages and Disadvantages of a market economy

Answer 6

Advantages:

Firms are efficient as they provide quality and quantity to the consumers

Firms have lower average costs since they are allowed to grow leading to economies of scale, and therefore lower prices, therefore fairer distribution

Disadvantages:

Inequality could rise as firms are not forced by restrictions of government and therefore can exploit consumers for more money

Monopolies exploit consumers through high prices

Question 7

Characteristics of a mixed economy?

Answer 7

Public goods accounted for by government (free rider problem solved)

Firms provide goods and services

Forces of supply and demand control the market

Therefore distribution is more fair and even than a market economy