Lesson 6 - The Allocation Of Resources Flashcards
Describe the free market
- buyers and sellers meet up and agree on a price
- buyers have more power, because they have choice
Why is allocative efficiency important?
resources are scarce, so we need to allocate them effectively
What is the definition of a market?
an arrangement where buyers and sellers can exchange goods and services
What are the 3 functions of money?
- medium of exchange
- shows value
- store of value
What are the features of a competitive economy?
- lots of buyers
- lots of sellers
- no buyer or seller dominates
What is the double coincidence of wants?
you have to want what the other person has in order to exchange, but money eliminates that
What are the 3 types of economies?
- market
- planned
- mixed
What is a planned economy?
everything is planned by the government (public sector)
What is a market economy?
market forces answer what to produce, how to produce it, and who gets it
What is a mixed economy?
elements of both a market and planned economy
What did Adam Smith believe?
argued that the pursuit of profit incentivises producers to make what consumers want
What did Karl Marx argue?
that the firms exploit workers and that a revolution was inevitable
What did Hayek argue?
free market and no government intervention
What are the advantages of the free market?
- profit incentivises firms
- allocative efficiency = demand is signalled by higher prices, so firms supply more and consumers get what they want
What are the disadvantages of the free market?
- the poor may miss out on essential services
- firms are motivated by profits, so they ignore negative externalities
- unequal distribution of wealth
