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MicroEcon Theme 1 CC 1 > Economic Systems > Flashcards

Economic Systems Flashcards

1
Q

What is a Market?

A

any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services

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2
Q

Why are markets important?

A

Prices act as a signal to potential buyers and sellers

If a firm can’t sell it’s output at the chosen price, this is a signal that consumer demand has fallen

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3
Q

Why are barter economics inefficient?

A

You need to find someone who has what you want and wants what you have = Double Coincidence of Wants

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4
Q

What functions does money perform?

A

Medium of Exchange
Measure of Value
Store of Value
Method of Deferred Payment

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5
Q

How is Medium of Exchange a function of money?

A

Used to buy and sell goods and services

Most important function

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6
Q

How is Measure of Value a function of money?

A

Allows value of goods and services can be compared

Price reflects value society places on them

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7
Q

How is Store of Value a function of money?

A

Nobody would accept money in payment if they did not trust they can use the money for future transactions

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8
Q

How is Method of Deferred Payment a function of money?

A

Money can be used to pay at future date for transactions carried out now

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9
Q

What is an economic system?

A

Complex network of individuals, organisations and institutions and their social and legal interrelationships

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10
Q

What is the function of the economic system?

A

Resolve the basic economic problem

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11
Q

What must an economic system determine?

A

WHAT is to be produced
HOW production is to be organised
FOR WHOM production is to take place

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12
Q

What are the main economic actors/agents?

A

Consumers
Factors owners
Producers
Government

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13
Q

What are consumers assumed to want?

A

Assumed to want to maximise their own economic welfare, utility or satisfaction

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14
Q

What are factors owners assumed to want?

A

Assumed to want to maximise returns

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15
Q

What are producers assumed to want?

A

Assumed to want to maximise profit

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16
Q

What are the government assumed to want traditionally?

A

Assumed to want to maximise social welfare for citizens

Establishes/influences relationships between groups

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17
Q

What are the 3 types of economic system?

A

Free Market
Mixed Economy
Planned Economy

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18
Q

What is a Free Market economy?

A

Economic System where resources are allocated by the price mechanism ie. supply and demand

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19
Q

What are most forms of production owned by in a Free Market Economy?

A

Owned by Private Individuals/Organisations

20
Q

What determines how resources are allocated in a Free Market Economy?

A

No government intervention

Force of market supply and demand

21
Q

What are consumers/producers/owners of private property motivated by in a Free Market Economy?

A

Self Interest

22
Q

What are the owners of factors of production and producers free to do in a Free Market?

A

Buy and sell with few government limits

23
Q

What is the political name for a free market economy?

A

Capitalism

24
Q

What are the names of two Free Market Economists?

A

Friedrich Hayek

Adam Smith

25
Q

What did Adam Smith believe?

A

By pursuing self interest, individuals would be led by ‘invisible hand’
This would lead to efficient allocation of resources
Competition in markets ensures firms produce goods at lowest possible cost
Greatest threat to economic growth = government intervention

26
Q

What did Friedrich Hayek believe?

A

Critical of socialism
Governments should not intervene in resource allocation because they are faced with imperfect information
Markets are more effective because they rely on people responding to incentives and signals
Price mechanism acts as communication network
Market will aggregate to decisions and reflect society

27
Q

What is a Command/Planned Economy?

A

Economic system where government, through planning process, allocate resources in society

28
Q

Who provides jobs for workers in a Planned Economy?

A

The state

29
Q

Who decides what is produced, how and for whom in a Planned Economy?

A

The state

30
Q

How does resource allocation work in a Planned Economy?

A

Market prices play little/no part in informing resource allocation
Queuing rations scarce goods

31
Q

What is the political name for a Planned/Command Economy?

A

Socialism/Communism

32
Q

Who supported the idea of a Planned/Command Economy?

A

Karl Marx

33
Q

What did Karl Marx think about Capitalism?

A

Criticised Capitalism
Believed small minority (bourgeoisie) who are owners of capital are ruling class
The masses (proletariat) who are labourers provide labour to produce goods and services
Owner of capitals objective is to make profit and to do this they exploit workers
Capitalism’s contradictions would lead to it self destructing and revolution among proletariat
Private property would be abolished replaced by common ownership of resources

34
Q

What is a Mixed Economy?

A

Economic System where resources are partly allocated by price mechanism/market and partly by government/state

35
Q

How does resource allocation work in a Mixed Economy?

A

Markets allocate many resources but government intervene to different extents in order to ensure minimum standard of living and correct market failure

36
Q

What are the different sectors in a Mixed Economy?

A

Private Sector

Public Sector

37
Q

What is the Private Sector in a Mixed Economy?

A

Private ownership of factors of production, competition

38
Q

What is the Public Sector in a Mixed Economy?

A

State owned/run, resources allocated through planning process
Governments intervene by raising revenue though taxes and redistributing income through benefits and direct provision of services

39
Q

What are producers/consumers motivated by in a Mixed Economy?

A

Self interest

40
Q

What are the advantages of a Free Market Economy?

A 
Competition (better quality and choice)
Lower prices
Freedom
Profit Motive
Customer Need should be met
41
Q

What are the disadvantages of a Free Market Economy?

A 
Market Failure (some goods wont be provided)
Overproduction of negative externalities, underproduction of positive externalities
Inequality
42
Q

What are the advantages of a Command/Planned economy?

A

Public services provided
Guaranteed jobs for all
Equality
Guaranteed housing

43
Q

What are the disadvantages of a Command/Planned economy?

A

Centralised decisions taken by people who may have imperfect information
Unable to respond to consumer preferences
Governments control peoples lives
Bureaucratic (red tape) with decisions held up by planning and committees

44
Q

What are the advantages of a Mixed economy?

A 
Competition
Freedom
Incentives to set up business
More equal income distribution (through tax and benefits)
Reduces inequality
Helps prevent market failure
Sets rules, regulations, laws
45
Q

What are the disadvantages of a Mixed economy?

A

Market Failure
Inequality
Problems associated with government intervention

MicroEcon Theme 1 CC 1 (6 decks)

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