How economies differ (ME CH3)

Question 1

Are total level of greenhouse emissions and greenhouse gas emissions per capita the same?

Answer 1

• no
• Total emissions can be calculated by multiplying per capita population by population size.

Question 2

Which of the following is most likely to be consistent with a centrally planned economy?
- free ownership of property
- private ownership of enterprise
- agricultural prices determined by the government
- efficient allocation of economic resources.

Answer 2

agricultural prices determined by the government

• not D because it is usually difficult to be efficient in a centrally planned economy due to lack of demand and supply mechanism

Question 3

Which of the following factors is most likely to result in an economy with a large population having a high quality life?
a) high GDP and life expectancy
b) low unemployment and high private ownership
c) high GDP per capita and high adult literacy
d) high HDI and government intervention

Answer 3

C
Quality of life is related not to overall GDP but GDP per capita and to the factors measured in
the Human Development Index, including adult literacy. Answer A is not correct because it
does not specify GDP per capita, and with a large population a country may have a high GDP
but a lower GDP per capita. Answers B and D include factors not directly used in quality-of-life
measures such as unemployment and government intervention

Question 4

Outline how consumer sovereignty and the price mechanism influence the production of goods and services in the economy. (2 marks)

Answer 4

• Consumer sovereignty means that consumers play a central role in a market economy.
• They demand certain goods and services, and this communicates to firms the goods and services
  that should be produced.
• If consumer demand increases for a particular good or service, this is likely to lead to an increase in the price.
• Businesses will increase their production of this
  good or service in response to the higher prices.
• This interaction between demand, prices and
  production is called the price mechanism.

Question 5

Explain how the price mechanism influences resource allocation in the labour market. (2 marks)

Answer 5

• A change in consumer demand leads to a change in production by businesses, which alters their demand for inputs, including labour.
  For example, an increase in the demand for pants will lead to increased production of pants. This requires more inputs, such as labour.
  To attract more labour, businesses increase wages, and workers in other sectors of the economy will change jobs to take advantage of these higher wages, thereby reallocating labour between industries in the economy.

Question 6

Outline one weakness of a pure market economy. (2 marks)

Answer 6

One weakness of a pure market economy is that the economic outcomes from the free market
can lead to a loss of utility due to inequality in the distribution of income and wealth, and
market failures. Individuals who do not have control or ownership of production may have
limited opportunities to acquire the capital or skills that allow them to increase their income.
Another weakness is the instability of the business cycle in market economies.

Question 7

Compare and contrast the features of a centrally planned economy and a market economy. (4 marks)

Answer 7

• A centrally planned economy is characterised by government control over economic decisions, with limited scope for individuals to influence economic outcomes.
• Central planning normally involves public ownership of factors of production, with the government playing the central role in allocating resources as it determines.
• A market economy, on the other hand, involves economic decisions being made by private individuals (through the process of consumer sovereignty) and private firms, both of whom are motivated by self interest.
• Market economies have limited government intervention, and rely upon the price mechanism to allocate factors
  of production.

Question 8

Why is “social security and welfare” the highest expenditure for the Australian Government? (data given) (1.5 marks)

Answer 8

This is often the largest item of expenditure in
budgets because one of the main objectives of government intervention is to create a more
equitable distribution of income. The government can redistribute income from taxing higherincome earners and provide that income to low-income earners via social welfare payments.
Social welfare payments ensure those who are not currently contributing to the production
process, such as the elderly and the unemployed, are not left without income.

Question 9

Outline two reasons why a government may intervene in an economy. (2 marks)

Answer 9

• A government may intervene in an economy because the market does not always provide the most efficient allocation of resources for the economy as a whole.
• An example of this is the government providing socially beneficial goods (merit goods) such as education and
  infrastructure, which may otherwise be under-provided by the private sector.
• A government may also intervene to achieve a socially desirable distribution of income. For example, the
  government may redistribute income, via social welfare payments, to cater for the needs of
  those who cannot contribute to the production process (such as people who are elderly or
  chronically sick).

Question 10

Describe how the government aims to promote economic stability (2 marks)

Answer 10

The government can promote economic stability through the use of spending and taxation
measures. By adjusting spending and taxation settings in response to changing levels of
economic activity, the government is able to influence periods in the business cycle. For
instance, to counteract the effects of an economic downturn, the government may introduce
higher levels of public spending and cut personal taxes which will have a stimulatory impact
on economic growth. On the other hand, during periods of stronger economic growth, the
government may introduce new taxes and cut government spending to dampen economic
activity.

Question 11

Outline the main arguments for and against government intervention in the economy. (4 marks)

Answer 11

• Governments intervene in the economy to address different types of market failure.
• A key argument for government intervention in the economy is that, through the tax and social welfare systems, it is able to reduce income and social inequality that is caused by the market,
  provide a better quality of life for the least fortunate in society and stabilise the economy in order to avoid a boom-and-bust cycle.
• Government intervention also means greater production of goods and services with community-wide or social benefits such as education, health care
  and transport infrastructure, many of which will not be provided in sufficient quantity by the market economy.
• On the other hand, too much government intervention may distort economic
  outcomes and create inefficiency.
• The government is generally less efficient than the price mechanism in responding to consumer and producer signals, and is therefore less efficient in allocating resources.
• Public ownership of factors of production may also stifle innovation, growth, and other outcomes achieved by firms pursuing maximum profits.

Question 12

photos: question 3
Using the table above, compare Australia’s quality of life and GNI per capita to one other economy. (2 marks)

Answer 12

Australia’s quality of life, as measured by its HDI ranking, is significantly higher than that of the
United States, despite the fact Australia’s GNI per capita, when adjusted for purchasing power
parity, is lower than that of the US. This may be explained by the US producing greater output
per person than Australia, but Australia having better average health and education outcomes.

Question 13

photos: question 3b
Outline why GNI per capita is used to compare the income levels of economies, rather than GNI. (2 marks)

Answer 13

GNI per capita is preferred over GNI in comparing income levels between economies as it
takes into consideration population size. By looking at how much income each individual
earns on average, rather than the total output of an economy, GNI per capita gives a clearer
indication of living standards for individuals within a country.

Question 14

Explain why it is possible for a country to have a high GNI per capita figure, yet a relatively low HDI. (2 marks)

Answer 14

A country may demonstrate a high average GNI per capita, yet a relatively low HDI, if a
significant proportion of the population has relatively poor health and educational outcomes.
This situation tends to occur in countries where income inequality is very high.

Question 15

Discuss Australia’s government intervention and spending compared to other economies. (4 marks)

Answer 15

In 2023, Australia was ranked 13th on the Index of Economic Freedom, which measures
government involvement in the economy through factors such as spending and regulation.
While this is behind certain free market economies in Asia such as Singapore and Taiwan, it is
much higher than most economies. General government expenditure in Australia was 42 per
cent of GDP in 2021, which was around the advanced economy average of 43 per cent. While
this requires taxes that reduce the function of free markets, it also means higher provision of
public goods and services. Compared to emerging and developing economies, where public
spending was 31 per cent of GDP, this higher level of public spending is required for
governments to meet public expectations relating to many aspects of the economy such as
social welfare, health and education systems.

Question 16

Define an economic system

Answer 16

It is the organizational structure that a society sets up to try and “solve” the economic problem and answer the four basic questions

Question 17

What are the 3 basic types of economic systems and what’s the forth?

Answer 17

1. traditional economy
2. planned economy
3. market economy
4. mixed economy

Question 18

Explain the traditional economy.

Answer 18

• Economic questions are answered by habits and customs (the way it has always been done)
• Children work the same jobs parents worked, often farming or hunter/gatherer
• Traditional work practices
• may use barter instead of money
• based on agriculture, fishing, hunting, gathering or some combination of the above
• E.g. Eskimos, aboriginal peoples

Question 19

What are the advantages and disadvantages of a traditional economy?

Answer 19

adv:
- everyone knows their role, little disagreement over economic roles- socio-cooperative lifestyle
- stable and predictable
- clearly answers 3 economic questions
- self efficiency
- in harmony with environment

dis:
- discourages new ideas, difficult to improve
- everything based on tradition so people may not be using their strengths
- stagnation
- lower standard of living

Question 20

Explain the planned/ command economy.

Answer 20

• The government answers the basic economic questions and controls the allocation of all resources.
• resulting in the lack of private property:There is little to no private ownership of businesses or property.
• as well as limited consumer choice
• and the lack of competition: no competition between businesses since the government controls all aspects of the economy.
• E.g. Communist Countries (Vietnam, North Korea, former Soviet Union, Cuba)

Question 21

What are the pros and cons of a planned/ command economy?

Answer 21

• Advantages: able to act quickly in emergencies, provide for all people equally
• Disadvantages: Inefficient, no incentive to work hard or be creative

Question 22

What does the government control in a command economy?

Answer 22

• controls what goods and services are produced, and how much they cost: Centralized economic planning
• controls goal of the economy: often is to promote social welfare and fair distribution of goods, rather than maximizing profits.
• controls prices:The government sets the prices of goods and services, and they remain fixed.

Question 23

why is there limited customer choice in a command economy?

Answer 23

• mainly because the key goal is fulfilling collective needs as determined by central planners, rather than satisfying individual consumer preferences and earning profit

also because
- State ownership or heavy control over industries limits competition and innovation.

• Bureaucratic processes slow down responsiveness to consumer preferences.

Question 24

what are some characteristics of a central planned economy?

Answer 24

• ownership of industry by government
• price controls
• inflexible plans set for future
• firms not allowed to fall despite being inefficient
• innovation difficulty since there is no reward for taking risk and creating new stuff
• lack of freedom due to political control
• managed by bureaucrats

Question 25

Explain what is the free market economy.

Answer 25

• Economic questions are answered by individual buyers and sellers
• Supply and demand influence economy
• People act out of self interest; motive for profit (money) drives the economy
• Also known as free enterprise or capitalism
• Ex. Singapore, USA, Japan

Question 26

Explain the mixed economy/

Answer 26

No economy is pure market, pure command or pure traditional, elements of each appear in all economies, some have more elements of one economy than another.

Question 27

Rank north korea, china, venezuela, france, sweden, the US, and japan on this diagram. (photos

Answer 27

photos

Question 28

What are the features of the Australian economy that shows it as a free market economy?

Answer 28

Economic Freedom: individuals have the right to choose
Competition: more than one producer of good/ services insures choice
Private Property: individuals have the right to own their own property, including business
Self-Interest: individuals make decisions based on what is best for them
Voluntary Exchange: individuals may freely buy and sell goods
Profit Motive: individuals are driven by a desire to profit (make money)

Question 29

What are the features of the Australian economy that shows it as a mixed market economy?

Answer 29

Government regulation of some business practices (Ex. Wages, labour hours, safety practice)
Government limits certain choices (Ex. Cannot buy or produce certain goods/services)
Government provides aid to the needy (Ex. Medicare, Centrelink, welfare)

Question 30

How would my pizzeria operate in a planned economy and what is its problem?

Answer 30

• The government answers the basic economic questions
• The government sets the amount of cheese and pepperoni on each pizza
• The government determines quality of cheese and pepperoni
• The government sets employees wages
• The government sets business hours
  Problem: What does the government know about pizza?

Question 31

How would my pizzeria operate in a free market?

Answer 31

• I answer the basic economic questions!
• I determine how much cheese and pepperoni goes on the pizza
• I determine the quality of the cheese and pepperoni
• I set my employees wages
• I set my business hours

Question 32

how would my pizzeria operate in a mixed economy?

Answer 32

• The Government and I both answer the basic economic questions
• I determine the amount of cheese and pepperoni on the pizzas; government determines the quality of cheese and pizza
• I set employee wages; government sets minimum wage for employees
• I determine business hours; government determines whether I am safe to be open or not

Question 33

what is an economic system?

Answer 33

It is the organisational structure that a society sets up to try and “solve” the economic problem and answer the four basic questions of “What?” “How”, “How Much” and “For whom?”

Question 34

What are the roles of the government in a market economy?

Answer 34

The only role of the government is to create and maintain private property rights and ensure the conditions for competition (no monopolies).

Question 35

what determines what people would prefer and what things cost in the market place?

Answer 35

the price mechanism

Question 36

define the price mechanism.

Answer 36

the system where the forces of demand and supply determine the prices of commodities and the changes therein.

Question 37

explain consumer sovereignty.

Answer 37

customers are free to choose how they will spend their income in order to satisfy their wants, therefore ultimately decide what goods and services will be produced, as business produce whatever goods and services are in demand.

Question 38

What are the key characteristics of a market economy?

Answer 38

• private ownership of property
• consumer sovereignty
• freedom of enterprise
• competition

Question 39

operation of a planned economy flowchart

Answer 39

Central government determines general long term strategic goals over a large period of time
↓
Communicates these to government agencies who form more specific plans for the short term
↓
Communicates these to managers of each industry who allocate resources to achieving detailed plans
↓
Communicates these to individual workers who carry out plans

Question 40

free market and command economy table

Answer 40

google

Question 41

what are other names for the market economy?

Answer 41

capitalist, free enterprise, laissez- faire

Question 42

product market

Answer 42

interaction of demand for and supply of the outputs of production (g&s)

Question 43

explain the price mechanism with sunglasses

Answer 43

1. increasec consumer demand
2. producers require extra factors of production to increase supply (inputs such as plastics, metals, skilled labour)
3. manufacturer have to offer higher prices in order to attract resources away from other areas of production (e.g. offer higher prices to labour)

Question 44

Describe freedom of enterprise (market economy

Answer 44

Individuals have the right to use their resources as they choose
= entrepreneurs are free to set up profit-making activities and have right to determine what g&s they produce and how they produce
- workers are free to choose occupation or whether they work or not

Question 45

what is the force that allows the price mechanism to work effectively and how?

Answer 45

competition
- ensures no single buyer or seller is big enough on its own to influence the market price so as to have an advantage (or greater bargaining power) over other players

Question 46

why does the government intervene in production and in what form?

Answer 46

1. free market may not always provide the most efficient allocation of resources for the economy as a whole
   - some necessary goods and services may not be provided e,g, railway system, as no one wanted to take the risk
   - some collective g&s like defence force and parks often arent provided by private sector
   - sometimes the government supplements the private supply: e.g. healthcare and education
2. provide regulation from ACCC
3. social welfare payments: there would be no income earned by those who don’t contribute to production du to illnesses/ age- government uses taxes for thee people
4. progressive income tax: redistributes income to achieve a more equitable sharing of produced output

Question 47

example of government intervention via prohibition of certain product in australia.

Answer 47

in october 2021, the purchase of nicotine vaping products without prescription was made illegal following concerns of increased uptake amongst young people
followed by a ban on the importation of non-prescription vapes in 2023.

Question 48

example of government intervention of how much to produce in australia.

Answer 48

• regulate number of taxi licenses issued to ensure the safe and reliable transport services and viability for business operators
  (challenged by competitive ride sharing companies like Uber
• implementing protectionist trad3 policies like import restrictions and taxes on g&s entering Australia or granting subsidies to encourage Australian producers to compete with foreigners to increase output

Question 49

example of government intervention of how to produce in australia.

Answer 49

• industrial relations laws provide framework for setting minimum wage levels and working conditions in different industries, influencing labour costs
• prohibition of child labour, environmental controls, safety rules

Question 50

briefly describe the australian economy within the asian economic region.

Answer 50

• 2/3 trading relationships are with asian economies, e.g. china, japan, republic of korea