Resource allocation in different economic systems chapter 4 Flashcards
middle-income economies (2 points)
economies where income per head was between $1026 and $3995 (lower middle income economies) and $3996 and $12375 (upper middle-income economies) in 2018 (World Bank)
economic system (2 points)
the way in which production is organised and choices are made in an economy.
market economy (4 points)
an economic system where most decisions are taken through the market mechanism.
The government has little or no direct involvement in the process of resource allocation.
Households and firms interact as buyers and sellers.
Price and the unrestricted operation of the price mechanism are central to the way in which resources are allocated.
planned economy (5 points)
an economic system where resources are state owned and allocated by a central body.
its true form only exists in theory.
The choices in terms of what to produce, how to produce and for whom to produce are all centralized.
Decision-making is taken by planning boards and organisations and, in principle, production is controlled by the state.
Private ownership of productive resources is restricted
mixed economy (4 points)
an economic system where both market forces and government are involved in resource allocation decisions.
both the private sector and public sector have a part to play in the allocation of resources.
Decisions involve an interaction between firms, labour and the government mainly through the market mechanism.
There is private ownership of most productive resources although there is some public ownership.
market mechanism (2 points)
resource allocation decisions are taken by individual producers and consumers with no government intervention; also known as price mechanism.
how market mechanism works (6 points)
excess supply from firms cause fall in price
fall in price causes firms to be less willing in supplying
firms less will to supply causes increase in price.
increase in price causes firms to supply
firms supplying causes increase in supply
increase in supply causes fall in price
role of government in a market economy (3 points)
the government’s role is to watch what is happening and only intervene when the price mechanism does not provide the best allocation of resources.
When the price mechanism does not work efficiently, the market ‘fails’.
No actual economy operates as a pure market economy.
key features of planned economy (4 points)
central government and its organisations are responsible for the allocation of resources.
Production targets are set for the main sectors of the economy, these are linked to planning for long-term growth through an increase in productive potential.
Price control of most essential items and the determination of wages are also controlled.
the ownership of most of the productive resources and property is in the hands of the state.
disadvantages of a planned economy (2 points)
The rise and fall of prices does not take place.
A consequence of artificially low prices is often excess demand relative to supply.
advantages of planned economy (2 points)
Governments of planned economies tend to set goals which are different from those of governments in market economies.
The objective is to achieve a high rate of growth in order to catch up on the progress made by the advanced market economies.
Privatization (2 points)
where there is a change in ownership from the public to the private sector.
involves the transfer of resources from public ownership to the private sector.
private sector (1)
part of an economy under private ownership.
public sector
part of an economy under government ownership.
emerging economy
one that is making quick progress towards becoming a high-income economy.
