Chapter 2 Flashcards
What is a market economy
Market forces are allowed to guide the allocation of resources in society
Centrally planned economy
The government guides resources allocation within a society
Mixed economy
A combination of market forces and government intervention guides the allocation of resources within a society
Division of labour
Specialisation means workers can focus on the tasks they work well at, thus increasing productivity. Splitting up processes into small tasks and a person doing each task efficiently makes the process quicker.
Negatives of the division of labour
Occopational immobility (lack of skills)
A worker who spends all his time doing narrow and repetitive tasks may find it tedious and become bored etc which would lead the worker to lose efficiency
Country more culrable to price changes
Barter system
An economy without money, so that transactions in goods and services rely on the direct exchange of other goods and services
Medium of exchange
a function that allows transactions to be made such as money
Incentive
A way of influencing another economic agents behavior
Specialisation
the process of concentrating on a task or activity in order to become an expert on it
A Market
a set of arrangements that allows a transaction to take place
Positives of mixed economy
Incentives to be efficient. Most business and industry can be managed by private firms. Private firms tend to be more efficient than government-controlled firms because they have a profit incentive to cut costs and be innovative.
Limits government interference. Mixed economies can reduce the amount of government regulation and intervention prevalent in a command economy.
Reduces market failure. Mixed economies can enable some government regulation in areas where there is market failure. This can include:
Regulation on the abuse of monopoly power, e.g. prevent mergers, prevent excessively high prices.
Taxation and regulation of goods with negative externalities, e.g. pollution,
Subsidy or state support for goods and services which tend to be under-consumed in a free market. This can include public goods, like police and national defence, and merit goods like education and healthcare.
A degree of equality. A mixed economy can create greater equality and provide a ‘safety net’ to prevent people from living in absolute poverty. At the same time, a mixed economy can enable people to enjoy the financial rewards of hard work and entrepreneurship.
Macroeconomic stability. Governments can pursue policies to provide macroeconomic stability, e.g. expansionary fiscal policy in times of a recession.
Even libertarians who dislike government intervention believe there needs to be legal support for private property and government provision of law and order.
Positives and Negatives of a Market economy
Consumers act as price signals to reach an equilibrium, increased efficiency, production and innovation. But there are monopolies, no government intervention and poor working conditions. Can lead to over consumption of demerit goods. Public goods are not provided. Merit goods such as education are under provided
income and wealth inequalities
lead to monopolies
under-provision of merit goods
fail to address negative externalities
Resource allocation
The way in which society’s productive assets are deployed across their alternative uses, and the way they are allocated can have a major impact on the wellbeing of members of society
Rational choice (consumers)
They set out to gain as much utility as possible from consuming a particular product, relative to the costs of the product
Rational choice (producers)
They set out to maximise profits
Who developed the theory of international communism
Karl Marx
Centrally planned government
This is where the government holds control over resource allocation in the economy. It has the coordination role in planning and directing the allocation of resources.
Positive and Negatives of a centrally planned economy
Negatives: It’s hard for the government to make thousands of decisions on individual matters. Meaning it could lead to market failure if the government make the wrong decisions as they don’t hold the same incentive to reach allocative efficiency. There is a lack of competition as no incentive to profit maximise or innovate due to government intervention and control. Very costly to implement - hard to micromanange
Pros: better allocation of resources as they produce what they need and lack of other brands etc.
What is Allocative efficiency
The production and goods and services match the needs and desires of the population
When does productive efficiency occur (Graph)
The point where Marginal cost intercepts average cost on the graph.
(mixed) Whom, how,what
What to produce: Determined by the government and the consumer’s preferences
How to produce: Determined by producers making profits and the government
For whom to produce: Both who the government prefers and the purchasing power of private individuels
What is productive efficiency:
Occurs when resources are used to the maximum possible output at the lowest possible costs
Negatives of mixed economy
How much should the government intervene?Can be difficult to know how much governments should intervene, e.g. discretionary fiscal policy may create alternative problems such as government borrowing.
Too much inequality?Mixed economies are criticised by socialists for allowing too much market forces, leading to inequality and an inefficient allocation of resources.
Government failure. Mixed economies are criticised by free-market economists for allowing too much government intervention. Libertarians argue that governments make very poor managers of the economy, invariably being influenced by political and short-term factors.
