Allocation Of Resources Flashcards
Market Economy
Supply and Demand (market forces) allocate scarce resources within society
Prices play a key role in providing signals to consumers and producers
Adam Smith’s view on market economies
Allocations take place via invisible hand. Countless decisions made by consumers and producers allocate resources based on competing wants and need
Karl Marx’s view on market economy
Owners of resources exploit positions of wealth at the expense of ordinary workers and members of society
This leads to a significant inequality in income and wealth which widens over time
He argues that resources should be allocated via government intervention to ensure all members of society benefitted from the wealth of the economy
What is to be produced
Producers are said to be sovereign as they determine what is to be produced. Consumers vote on what’s to be produced by spending their money on goods/services
How is it produced
All things being equal consumers buy from producers with the lowest price , hence producers produce at the lowest cost
Who do they produce it for:
This is determined by level of consumer income and wealth which in a market economy is their ownership of factors of production
Those with high incomes and wealth can buy more than those with low incomes and wealth so goods are catered more towards them, hence wealthy gain a disproportionate share of whats produced which can be seen as unfair
Role of government in a market economy
Minimum intervention - minimum necessary to ensure orderly working of the market economy i.e.
Some goods like public defence are provided by the government
The government issues money to maintain its value
Provide law and order throughout the country
The Government must help to prevent market failure if they break down
Command economics
Resources are allocated by the government
Issues to command economies
Planners, consumers, and workers
Motivation - everyone is assumed to be selfless and work for the common good
Public ownership - all factors of production is owned by the government so there are no private sectors this leads to lack of innovation between the markets as there is no competition
Planning - resources are allocated through a planning process hence it is easy for corruption to arise
Mixed economies
Mixture of both planned and free enterprise(market) economy, balance between market mechanisms and allocations by the planning process
Characteristics of mixed economies
Public sector - consists of those firms and industries run and controlled by the government i.e. Nationalised industries
Private sector - firms run and controlled by individuals i.e. Privatised industries
Competition - exists in the private sector, consumers have more choice and there is more innovation
Government - regulates the economic activities of private sectors, provides both public goods (free goods) and merit goods (goods that are under-provided by the market)
Limitation of the market economy
Choice
Quality & innovation
Economic growth
Distribution of income & wealth
Risk
Choice (limitations of market economy)
High incomes will have a wider range of choice in comparison to those of low income
Distribution of income and wealth (limitations of the market economy)
Groups of people with little to no income due to no fault of their own have a low quality of life due to this and that there is a general imbalance between the wealthy and poor
Quality & innovation (limitations of the market economy)
Firms that fail to compete with one another are likely to be driven out of business.
Markets tend to be oligopolistic/ markets have a small number of dominant large firms
