Chapter 2 - The allocation of resources, specialisation and trade Flashcards
What is resource allocation?
The way in which a society’s productive assets (factors of production) are deployed across their alternative uses.
What is a market economy
An economy where market forces are allowed to guide the allocation of resources within a society
What is a centrally planned economy?
An economy where the government guides resource allocation within a society
What is a mixed economy?
An economy where a combination of market forces and government intervention guides the allocation of resources within a society
What is 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 is an ‘invisible hand’?
a term used by Adam Smith to describe the way in which resources are allocated in a market economy
It is a guide to firms to produce the goods and services that consumers wish to consume.
What is a disadvantage of centrally planned economies?
Given the complexity of modern economies, reliance on central planning poses logistical (organisational) problems
What is an advantage and a disadvantage of free market economies?
Advantage: The use of an invisible hand guides firms to produce the goods and services that consumers wish to consume. This causes consumers to try and maximise their satisfaction and firms to maximise their profits
Disadvantage: Sometimes a free market fails to produce an outcome which is good for society.
What is specialisation?
The process of concentrating on a task or activity in order to become skilled in it.
What is division of labour?
A process whereby the production procedure is broken down into a sequence of stages and workers are assigned to particular stages.
What are the advantages of specialisation/division of labour?
- Workers can focus on tasks they perform well and hence become more productive
- Training can be provided more cost effectively when it is focused on the specific tasks workers need to perform.
- Working as a team allows more overall output to be produced.
- It addresses the problem of scarcity making sure that resources are used efficiently.
- Opens up the possibility of trade
What are the disadvantages of specialisation/division of labour?
- A worker who spends his time on a narrow and repetitive task may find that it becomes tedious, or he becomes bored and careless.
- Over specialisation may mean that a team of workers becomes inflexible
- If firms focuses on production of a narrow range of products, it will face difficulties.
- If a worker specialising in a key part of the production process becomes unavailable, it may be difficult to find cover.
- Some countries are better equipped to produce some products than others (e.g UK cannot produce pineapples and mangoes, while many F1 teams have the HQs there so they can benefit skills and expertise available in the local workforce)
- If nations overspecialise, they could be left in a vulnerable position (e.g. If a country focused all its resources on agriculture, if the country goes to war, it will be at a disadvantage)
How does specialisation and division of labour address the problem of scarcity?
Making sure that society makes the best possible use of resources available to it.
Where does the gains from specialisation and trade come from?
Difference in opportunity cost (check page 24 on textbook)
What is the definition of a market?
A set of arrangements that allows transactions to take place.
What is a barter system?
An economy without money so that transactions in goods and services rely on direct exchange.
What does it mean by ‘money as a medium of exchange’?
The function of money that allows transactions to take place
What does it mean by a ‘double coincidence of wants’?
Someone who wants what you have and who has what you want
Why is the barter system inefficient?
Finding a double coincidence of wants is difficult, as people have and want different things, which is why money is used as a medium of exchange.
What is the role of the government in a FREE market?
They implement basic legal framework so an economy is able to operate and implement incentives
(e.g. property rights - if a farmer doesn’t have a right to own property may not have an incentive to invest in improving their land. Property rights assures the incentives for the owners of capital)
