LS6 - Economic Systems

Question 1

What is planning according to economics?

Answer 1

Planning reefers to the process by which a government allocates resources. This is funded through taxation.

Question 2

What is a market?

Answer 2

A market is anywhere buyers and sellers exchange goods and services. This can be physical or digital

Question 3

What is the price mechanism?

Answer 3

The process by which the market allocates resources

Question 4

What is the relationship between price, supply, and quantity?

Answer 4

As price increases, supply increases and likewise. This causes quantity to increase as supply increases too

Question 5

What is the relationship between price, demand, and quantity?

Answer 5

As price decreases, the demand increases, and so quantity increases

Question 6

What is the point where the supply and demand lines cross?

Answer 6

This is called the intersection and is where a free market is at equilibrium

Question 7

What is a command economy?

Answer 7

Command economy is an economy in which resources are allocated solely by the state

Question 8

What is a mixed economy?

Answer 8

A mixed economy is that in which resources are allocated by the state and the price mechanism. This is because it consists of the public and private sector

Question 9

What is a free market economy?

Answer 9

A free market economy is an economy in which resources are allocated solely by the price mechanism of the private sector so that supply and demand determines most

Question 10

What countries best exemplify each economy?

Answer 10

Command economy: China
Mixed economy: UK
Free market economy: USA

Question 11

What is the public sector?

Answer 11

The public sector is the part of the economy which is controlled or owned by the government

Question 12

What is the private sector?

Answer 12

The private sector is the part of an economy which is not controlled or owned by the government. Individuals or groups seeking to profit maximise make up the private sector

Question 13

What is the profit motive?

Answer 13

Profit motive is the aim of firms to maximise profit margins by maximising revenue and minimising costs

Question 14

What does the profit motive result in?

Answer 14

The profit motive leads to wider choice because this incentivises firms to develop new products (invention) and firms to meet consumer demand (market research/innovation)

Question 15

How big is the profit motive in command economies? Why is this? Consequence?

Answer 15

The profit motive is absent in command economies as the government decides and the firms are told what to produce. This can lead to limited choice

Question 16

Why may free markets and mixed economies have limited choice?

Answer 16

Concentrated market and monopolies can limit choice in free market and mixed economies

Question 17

What is a concentrated market?

Answer 17

Where there is a few large sellers that dominate the market: Supermarkets, Soft Drinks, Airlines

Question 18

What is a monopoly?

Answer 18

By law, if 25% or more of the market is owned by a firm in the market are called a legal monopoly. If this becomes larger, then it is a natural monopoly where there is one supplier. A pure monopoly is where there is one that has the entire market

Question 19

Why is quality and innovation higher in a mixed and free market economy?

Answer 19

This is because both competition and the profit motive are present in these types of economy

Question 20

What is efficiency?

Answer 20

Efficiency is concerned with the optimal production and distribution of these scarce resources

Question 21

Why are mixed and free economies more efficient than command economies?

Answer 21

Command economies lack competition and the profit motive

Question 22

Why do free markets and mixed economies have a less equitable distribution of income and wealth than command economies?

Answer 22

This is because the owners of capital and land accumulate wealth over time and pass privilege on to their children through property, private education and social networks

Question 23

Do command economies lack equitability?

Answer 23

Sometimes command economies lack equitability in terms of opportunity and access to public services

Question 24

How does private ownership of capital and land result in unequal distribution of income and wealth?

Answer 24

Capital and land rises in value increasing the return, wealth, and distribution of income

Question 25

Why does inequality still tend to be a problem in command economies?

Answer 25

Governments switch between command and free as they lose interest
Governments regain a profit motive