Chapter 2: The allocation of resources, specialisation and trade

Question 1

Why are choices complicated?

Answer 1

Many of society’s resources can be deployed in different ways or may have alternative functions

Question 2

Define resource allocation

Answer 2

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

Question 3

What can the way in which resources are allocated have a major impact on?

Answer 3

The wellbeing of the members of a society

Question 4

What will the decision regarding maximizing utility depends upon?

Answer 4

The benefits gained from consuming a good relative to the costs involved

Question 5

What may the costs of maximizing utility depend upon?

Answer 5

The price of the good as well as the opportunity cost

Question 6

Why is the price of a product important?

Answer 6

It will be seen as a signal from firms to households about the conditions under which they are prepared to provide the good, and a signal from households to firms about how much they are prepared to spend

Question 7

What do economic agents respond to?

Answer 7

Incentives

Question 8

Evaluate the effectiveness of incentives (4)

Answer 8

1. Will the incentives be strong enough?
2. Will the chance of a cheap haircut really encourage you to go if you don’t need one?
3. Would a government reduce the size of the police force in order to be able to reduce taxes?
4. Will a firm always try to increase profit by dropping the quality of its product

Question 9

What do economic agents need to make assumptions about?

Answer 9

What they want to achieve and how they respond to economic circumstances and incentives

Question 10

Define market economy

Answer 10

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

Question 11

Define centrally planned economy

Answer 11

The government guides resource allocation within a society

Question 12

Define mixed economy

Answer 12

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

Question 13

How do consumers express changes in their preferences?

Answer 13

Through their decision to buy or not to buy at the going price

Question 14

Define capitalism

Answer 14

A system of production in which there is private ownership of productive resources, and individuals are free to pursue their objectives with minimal interference from the government

Question 15

What’s the key characteristic of capitalism?

Answer 15

Individuals own the means of production and can pursue whatever activities they choose

Question 16

Why is a basic framework of property rights essential?

Answer 16

Because it affects incentives

Question 17

When is a basic legal framework also needed?

Answer 17

If an economy is to be able to operate

Question 18

Why are secure property rights significant?

Answer 18

This assures the incentives for the owners of capital

Question 19

Define the invisible hand

Answer 19

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

Question 20

What does the market mechanism ensure?

Answer 20

That individual actions will bring about a good result for society overall

Question 21

Where is a solution to the coordination problem found?

Answer 21

Through the free operation of markets

Question 22

Who was Karl Marx (1818-1883)

Answer 22

A philosopher and economist

Question 23

What did Karl Marx develop?

Answer 23

The theory of international communism

Question 24

What did Marx argue would happen in a capitalist society?

Answer 24

The owners of capital would exploit their position at the expense of labour which would result in a revolution

Question 25

Name a disadvantage of a centrally planned economy

Answer 25

Poses enormous logistical problems

Question 26

Name an example that largely discredited communism

Answer 26

The collapse of the Soviet bloc in the 1990s

Question 27

Name 2 countries that continue to persist with central planning

Answer 27

1. Cuba

2. North Korea

Question 28

How has China moved away from central planning

Answer 28

By beginning to allow prices to be used as signals

Question 29

Evaluate economic systems (4)

Answer 29

1. Free market and centrally planned tackle the problem of how to allocate resources in very different ways
2. Free market may fail to produce an outcome that is good for society
3. Logistical problems facing a centrally planned economy also create insurmountable difficulties in micromanaging a complex system
4. Most countries now operate a mixed system

Question 30

What might changing incentives influence?

Answer 30

Economic behavior

Question 31

Define specialization

Answer 31

The process of concentrating on a task or activity in order to become an expert in it

Question 32

What’s an important aspect of resource allocation?

Answer 32

Whether or not an economy is using resources effectively

Question 33

Define division of labour

Answer 33

A process whereby the production procedure is broken down into a sequence of stages and workers are assigned to particular stages

Question 34

Why is the division of labour effective?

Answer 34

Because individual workers become skilled at performing specialized tasks

Question 35

By focusing on a particular stage, what happens?

Answer 35

They become highly adept, and therefore more efficient

Question 36

Name 2 reasons why specialization is more efficient

Answer 36

1. Workers don’t spend time moving from one activity to another
2. Enable firms to operate on a larger scale of production

Question 37

Analyse the division of labour (7)

Answer 37

1. Specialisation means workers can focus on the tasks they perform well at
2. They become more productive
3. Training can be provided more cost-effectively when focused on specific tasks
4. Working as a team allows for more output to be produced
5. Specialisation can be taken too far as a worker may find that a task becomes tedious or becomes bored and careless
6. A team of workers may become inflexible as if one worker falls ill it may be difficult to find cover
7. Specialisation takes place on a national level as some countries are better equipped at producing certain goods

Question 38

Define market

Answer 38

A set of arrangements that allows transactions to take place

Question 39

What does a market bring together?

Answer 39

Potential buyers and sellers

Question 40

Define barter system

Answer 40

An economy without money so that transactions in goods and services rely on the direct exchange

Question 41

Define money as a medium of exchange

Answer 41

The function of money that enables transactions to take place

Question 42

Define a double coincidence of wants

Answer 42

Someone who wants what you have and has what you want