Micro 11 - Economic Systems Flashcards
What is the market economy?
The market economy is the free market, in which scarce resources are allocated by supply and demand.
What allocates resources in the market economy?
Supply and demand (The price mechanism)
What economy is the UK?
Mixed economy
Explain how the market mechanism would operate in a situation in which there is excess supply in a market.
Prices will fall, demand increases, firms will supply less.
Theoretically, the market economy allocates scarce resources efficiently. When this happens there is no need for the government to intervene. Why?
Allocative efficiency is achieved.
Why does the government ever intervene in markets?
- Ensure equality
- Reduce poverty
What is the command economy?
Government allocates resources
Why is there often shortages of basic supplies in command economies?
In command economy, the government cannot respond to excess demand as entrepreneurs have no incentive to produce.
In market economy, the self-interest of entrepreneurs will make goods and services because they want higher profits.
What is a mixed economy?
where the government and the market allocate scarce resources
Why is the mixed economy preferred for most countries?
- Control
- Necessities
- Equality
- Fixing market failure
- Regulation
- Maintain law and order
What are the issues of mixed economies?
Some shortages in short term
High inflation
Lack of regulation in market economies
