Chapter 6: The Role of Markets in Allocating Resources

Question 1

The three key allocation decisions

Answer 1

• What to produce?
• How to produce it?
• Who is to receive the products produced?

Question 2

Different economic systems

Answer 2

• Planned economic system
• Market economic system
• Mixed economic system

Question 3

Different economic systems: Planned economic system

Answer 3

An economy in which the state (government) makes the decisions about what to produce, how to produce it, and who receives it.

The state owns all, or at least most, of the land and capital, and employs workers. The state gives instructions, sometimes called directives, to state-owned enterprises (SOEs) on what to produce and how to produce it.

The state determines who gets the products made, both by deciding on the remuneration paid to the workers and by controlling prices.

Question 4

Different economic systems: Market economic system

Answer 4

• Consumers determine what is produced
• Signal preferences through the price mechanism
• Government intervention is minimal
• Land and capital are privately owned
• Private sector firms decide how to produce the products consumers want to buy
• Some firms decide to be capital-intensive or labour-intensive.
• Those earning the highest incomes exercise the maximum influence on what is produced.
• Those workers whose skills are in highest demand and are the most successful

Question 5

Price mechanism

Answer 5

Process by which price changes in response to a change in demand or supply help al;loicate resources to their best uses.

Question 6

Capital-intensive

Answer 6

The use of a high proportion of capital relative to labor.

Question 7

Labour-intensive

Answer 7

The use of a high proportion of labour relative to capital

Question 8

Demand

Answer 8

The willingness and ability to buy a product

Question 9

Supply

Answer 9

The willingness and ability to sell a product

Question 10

Changes in resource allocation in a market economy