Chapter 2: The allocation of resources, specialisation and trade Flashcards
Why are choices complicated?
Many of society’s resources can be deployed in different ways or may have alternative functions
Define resource allocation
The way in which society’s productive assets are deployed across their alternative uses
What can the way in which resources are allocated have a major impact on?
The wellbeing of the members of a society
What will the decision regarding maximizing utility depends upon?
The benefits gained from consuming a good relative to the costs involved
What may the costs of maximizing utility depend upon?
The price of the good as well as the opportunity cost
Why is the price of a product important?
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
What do economic agents respond to?
Incentives
Evaluate the effectiveness of incentives (4)
- Will the incentives be strong enough?
- Will the chance of a cheap haircut really encourage you to go if you don’t need one?
- Would a government reduce the size of the police force in order to be able to reduce taxes?
- Will a firm always try to increase profit by dropping the quality of its product
What do economic agents need to make assumptions about?
What they want to achieve and how they respond to economic circumstances and incentives
Define market economy
Market forces are allowed to guide the allocation of resources within a society
Define centrally planned economy
The government guides resource allocation within a society
Define mixed economy
A combination of market forces and government intervention guides the allocation of resources within a society
How do consumers express changes in their preferences?
Through their decision to buy or not to buy at the going price
Define capitalism
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
What’s the key characteristic of capitalism?
Individuals own the means of production and can pursue whatever activities they choose
Why is a basic framework of property rights essential?
Because it affects incentives
When is a basic legal framework also needed?
If an economy is to be able to operate
Why are secure property rights significant?
This assures the incentives for the owners of capital
Define the invisible hand
A term used by Adam Smith to describe the way in which resources are allocated in a market economy
What does the market mechanism ensure?
That individual actions will bring about a good result for society overall
Where is a solution to the coordination problem found?
Through the free operation of markets
Who was Karl Marx (1818-1883)
A philosopher and economist
What did Karl Marx develop?
The theory of international communism
What did Marx argue would happen in a capitalist society?
The owners of capital would exploit their position at the expense of labour which would result in a revolution
Name a disadvantage of a centrally planned economy
Poses enormous logistical problems
Name an example that largely discredited communism
The collapse of the Soviet bloc in the 1990s
Name 2 countries that continue to persist with central planning
- Cuba
2. North Korea
How has China moved away from central planning
By beginning to allow prices to be used as signals
Evaluate economic systems (4)
- Free market and centrally planned tackle the problem of how to allocate resources in very different ways
- Free market may fail to produce an outcome that is good for society
- Logistical problems facing a centrally planned economy also create insurmountable difficulties in micromanaging a complex system
- Most countries now operate a mixed system
What might changing incentives influence?
Economic behavior
Define specialization
The process of concentrating on a task or activity in order to become an expert in it
What’s an important aspect of resource allocation?
Whether or not an economy is using resources effectively
Define division of labour
A process whereby the production procedure is broken down into a sequence of stages and workers are assigned to particular stages
Why is the division of labour effective?
Because individual workers become skilled at performing specialized tasks
By focusing on a particular stage, what happens?
They become highly adept, and therefore more efficient
Name 2 reasons why specialization is more efficient
- Workers don’t spend time moving from one activity to another
- Enable firms to operate on a larger scale of production
Analyse the division of labour (7)
- Specialisation means workers can focus on the tasks they perform well at
- They become more productive
- Training can be provided more cost-effectively when focused on specific tasks
- Working as a team allows for more output to be produced
- Specialisation can be taken too far as a worker may find that a task becomes tedious or becomes bored and careless
- A team of workers may become inflexible as if one worker falls ill it may be difficult to find cover
- Specialisation takes place on a national level as some countries are better equipped at producing certain goods
Define market
A set of arrangements that allows transactions to take place
What does a market bring together?
Potential buyers and sellers
Define barter system
An economy without money so that transactions in goods and services rely on the direct exchange
Define money as a medium of exchange
The function of money that enables transactions to take place
Define a double coincidence of wants
Someone who wants what you have and has what you want
