Pack 4 Flashcards
Define equilibrium price
Where the quantity demanded equals the quantity supplied for a good or service in the market.
Explain excess demand and supply and how they would be shown on a diagram
Excess supply is where the quantity supplied exceeds the quantity demanded for a good at the current market price (extra supply).
Excess demand is where the quantity demanded exceeds the quantity supplied for a good at the current market price (less supply).
Define the term ‘free market economy’ and name 1 or 2 economists who are in favour of this economic system
Where all resources are allocated via the forces of supply and demand. There is no government intervention.
-Supported by Adam Smith and Friedrich Hayek.
Explain 2 benefits and 2 drawbacks of a free market economy
Benefits:
-Many firms producing products should mean greater consumer choice.
-There are financial incentives like profit and wages which encourage people to work hard.
Drawbacks:
-Without government intervention, the vulnerable in society may not be helped leading to income inequality.
-Some products (AKA public goods) must be provided by the state and will not exist in a pure free market like street lights.
Explain 2 benefits and 2 drawbacks of a command economy
Benefits:
-The government can directly provide goods such as education and healthcare.
-There may be less inequality due to gov control of wages. Unemployment may be lower as the gov can create jobs.
Drawbacks:
-Lack of competition can mean less choice, less quality and lower productivity.
-Lack of financial incentives mean entrepreneurs do not have the incentive to take risks and labour lacks incentives to work hard.
Define the term ‘command economy’ and name 1 or 2 economists who are in favour of this economic system
Where there is state ownership of resources and these are allocated by the government.
-Supported by Karl Marx.
Define the term ‘mixed economy’ and identify 3 goods/services provided by the government in most mixed economies
Where some resources are owned and allocated but the private sector and some by the public sector.
3 goods/services:
-Healthcare
-Education
-Benefits
Choose one good provided by the government in a mixed economy and explain why the government provides it
Education:
The UK government provides education to everyone so children can learn and then grow up to work in important jobs and provide the country with their services/goods.
Explain 3 reasons why consumers may not act rationally
Herding behaviour:
We are greatly influenced by what those around us are consuming. For example if some people befriend a group of smokers, they will likely become a smoker.
Habitual behaviour:
There is a tendency for people to stick with their current situation. For example, many people order the same meal every time when going to a food joint because they know it will satisfy them but if they pick another meal they have never tried, it might not satisfy them. This also means they are missing out on possible utility gains which is irrational.
Weakness at computation:
People tend to exaggerate small probabilities in their thinking. For example articles on how we triple our chances of getting diabetes can overly swing consumers into avoiding certain food but the actual impact on increasing risk of diabetes could be tiny.
Explain the 3 functions of the price mechanism
Price mechanism - the use of market forces to allocate resources in order to solve the economic problem of what, how and for whom to produce.
Functions of the price mechanism:
-A rationing function, scarce resources are allocated to those who are prepared to pay the most for them. In effect the prices change until equilibrium is reached.
-An incentive function, consumers send information to producers about the changing nature of needs and wants. Rising prices act as an incentive to firms in the market to produce more of a good/service.
-A signalling function, the PM indicates changes in the volume of demand or supply. E.g. a fall in demand will mean a lower price which encourages firms to ration the resources allocated to this product and vice versa if demand is rising.
