Economics - 1.1.2 - The allocation of resources Flashcards
What are incentives?
things that motivate or encourage someone to do something
used for competitive markets to work efficiently so economic agents must respond to price signals in the market
what are the advantages of incentives?
-firms respond to incentives as they produce more of a product to gain profit if products are popular
-consumers respond to incentives as they will switch to cheaper alternatives if the price of a product goes up
what are the disadvantages of incentives?
-firms distort incentives as they may make poor quality goods that pollute the environment to get fast profits
-consumers may not respond to incentives eg cigarettes
what are markets?
set of arrangements to allow transactions to be made
price is important to a successful market
What are the advantages of markets?
Resources allocated towards satisfaction of consumer who is king and firms only survive if they consistently satisfy consumer demand
Firms compete with each other by offering different products and provides consumers with a wide choice
Competition keeps prices down and quality up of goods and services
what are the disadvantages of markets?
some goods not easily traded in markets eg healthcare as the value isnt the real value of the service
markets missed if consumers have a need which firm arent able to enter the market to supply (public good)
incomplete markets if firms only supply a part of the market demand ( merit goods)
what is the governments role in markets?
used as a neutral party for when markets go wrong on their own
what are the advantages of governments role in markets
governments allow for better distribution of wealth and income in society so the rich dont gain as much utility from extra income than the poor
governments correct market failure by intervening in the market
govs intervene on the micro level with firms and macro level with society
what are the disadvantages of governments role in markets
governments make wrong decisions in markets eg allowing fracking
lots of discussions and red tape delay decisions
no incentive to be efficient as the government which leads to poor outcomes
consumers should have personal freedom to choose what they consume
what is the definition of resource allocation
the way in which a societies factors of production are used amongst alternative uses
what is an example of resource allocation
choosing between capital and consumer goods
if we produce consumer goods (food) today, we wont benefit from future gains of production
if we produce capital (machinery) today, we wont benefit from food today and may starve
What is a market economy?
market forces are allowed to guide the allocation of resources within a society eg capitalism
price used to signal to consumers what to buy and to firms what to sell
consumers maximise utility and firms maximise profit
what are the advantages of a market economy?
competition drives firms to be more efficient and lower prices and compete to use better resources and cut costs
consumer sovereignty where consumers buy goods they like which gives them the best utility
more choice of products with more competition
profits for rewards for taking risks and providing markets with preferred goods
what are the disadvantages of a market economy
firms may cut costs which hurt society eg exploiting workers
goods not profitable wont survive and rural areas suffer due to low transport and postal services
certain people cant work and may fall into poverty
large firms exploit markets and suppliers
what is a centrally planned economy
resources allocation guided by the state
profit maximisation isnt a goal and avoid overproduction and get rid of economic cycles
government responsible for distributing income and goods and services amongst various uses
what are the advantages of a centrally planned economy
government guides economic growth
government direct resources where needed
what are the disadvantages of a centrally planned economy
lots of small decisions to be made about households by the state who dont have enough time
may lead to oversupply of basic food rather than high end technology
inaccurate targets force firms to cut corners to gain government money
stifles economic freedom (consumers have no choice)
What is a mixed economy?
resources allocated partly through price signals and partly through direction of the government
prices signal firms and consumers but the government intervenes through markets and influence resource allocation through taxes and expenditure
What are the three types of a mixed economy
public and private ownership of industry
market based allocation with economic planning
free markers with state intervention
what are the advantages of a mixed economy
business left to private firms which increases efficency
reduces government control (only intervene when necessary)
governments can correct market failure
financial reward for hard work
what are the disadvantages of a mixed economy
difficult to know how much governments should intervene
socialists believe there is too much freedom of market forces
libertarians believe too much gov intervention
what is productive efficiency
firms operate at minimum average total cost
choose an appropriate combination of inputs and producing maximum output possible of these inputs
any part on the PPC curve is productively efficient
what is pareto optimality
an allocation of resources if no allocation of resources can make an individual better off without making someone else worse off
what is economic efficiency
when productive and allocative efficiency is achieved
what are the benefits of productive efficiency
higher production
lower costs
more supply
what are the benefits of allocative efficiency
goods which consumers wish to buy as productive efficiency produces goods which may be harmful or useless
what are the benefits of economic efficiency
maximum production
minimised wasted resources
lower costs
goods that society wish to consume
