Market economy

Question 1

Centrally planned economy advantages

Answer 1

• Guarantee a minimum standard of living
• the government can decide what should be produced, how and for whom.
• low levels of unemployment
• less inequality of wealth

Question 2

Centrally planned economy disadvantages

Answer 2

• lack of profit incentive (exports may not compete on price or quality.
• resources allocated inefficiently
• reduced choice for consumers
• time and money wasted

Question 3

What is a centrally planned economy?

Answer 3

Government takes on the role of coordinating resource allocation. Resources are controlled and allocated by state controlled planning boards by politicians. e.g. Peru.

Question 4

Free economy advantages?

Answer 4

-Competition between firms forces them to produce as efficiently as possible.
-resources are allocated efficiently
-competition leads to a greater choice for consumers
Lower prices for consumers

Question 5

Free Market disadvantages

Answer 5

• can lead to inequality in the distribution of income
• demerit goods are produced and purchased (consumers uninformed choices)
• large firms benefit from economies of scale. Difficult for smaller firms to compete on price.
• certain public goods are not provided in free market. No one build Thames.
• large firms can exploit firms

Question 6

What is the mixed economy?

Answer 6

All economies are mixed economies. They differ only in the emphasis they place on market forces versus government planning.

Allocated through a combination of market forces and government direction.

Question 7

What is non-pecuniary?

Answer 7

Things which do not involve money.

Question 8

What is the market economy?

Answer 8

All factors of production are privately owned; self-internet is the only motivation, resources are allocated through the interactions of buyers (demand). Sellers (supply) in market. Prices create incentives. Government no role in allocation.

The government must still provide legal framework with the rule of law and a system of property rights.

Question 9

Market system is often referred to as…

Answer 9

Capitalism

Question 10

What must the government provide in a free market economy?

Answer 10

• basic legal framework

- property rights

Question 11

What is a market?

Answer 11

A market exists wherever consumers and producers come together for the purpose of exchange.

Question 12

What are sub-markets?

Answer 12

A market within a market

Question 13

What is demand?

Answer 13

Refers to the quantity of a product that buyers are willing to buy at various prices over a time period, ceretis paribus.

Question 14

What is ‘ceteris paribus’?

Answer 14

All over things being equal

Aka change one thing at a time.

Question 15

Resource allocation

Answer 15

The way in which a society’s productive assets are used amongst their alternative uses.