The Market Economy 1.2 Flashcards
(11 cards)
Resource allocation 1.2
What is resource allocation?
This refers to how resources are distributed among producers and how goods and services are distributed among consumers
Incentives on economic agents for resource allocation 1.2
How do incentives influence economic agents?
- Incentives influence how economic agents allocate resources. Entrepreneurs are motivated by profit, encouraging them to take risks and innovate. Rewards encourage beneficial behavior, while penalties discourage harmful actions. If incentives are poorly set, resources may be misallocated.
- Market prices act as signals, influencing decisions to buy or sell, which in turn affects production and resource use.
- High demand and prices lead firms to allocate more resources to those goods.
- Innovation also helps reduce costs and improve products, but without proper incentives, production becomes inefficient and resources are wasted.
Market Economies/Laissez-fair economies 1.2
What is the laissez-fair economy?
- Market economies (aka laissez-faire economies) involve minimal government intervention.
- Private individuals and firms make all economic decisions and own resources.
- In practice, governments do intervene, e.g., via laws and public services (property rights, national defence).
- Adam Smith and Friedrich Hayek were key supporters of free markets.
- Smith promoted the “invisible hand” theory, where prices and allocation are driven by consumer and business spending decisions.
- Smith acknowledged potential monopoly issues in free markets.
- Hayek argued that government intervention worsens markets.
- After the 1930s crash, he blamed low interest rates and poor investment choices encouraged by the government.
Market economies 1.2
What are the 3 economic questions?
- What to produce: determined by what the consumer prefers
- How to produce it: producers seek profits
- For whom to produce it: whoever has the greatest purchacing power in the economy, and is therefoer able to buy the good
Market economies 1.2
What are the advantages of Market Economies?
- Firms are likely to be efficient because they have to provide goods and services demanded by consumers. Also likely to lower their average costs and make better use of scarce resources. Overall output of the economy increases.
- The bureaucracy from government intervention is avoided.
- Some economists argue the freedom gained from having a free economy leads to more personal freedom
Planned Economy 1.2
What is a planned economy?
- Planned economy is where the governement allocates all the scarce resources of the economy to where they think it is needed greater.
Link to karl max and how he saw free market as unstable and saw profits created in the free market as coming from the exploitation of labour.
What to produce: determined by what governent prefers
How to produce it: governments + their emplyees
Whom to prodice it: who the goverment prefers
Whom to produce it: who the government prefers
Planned Economy 1.2
What are advantages of a Planned Economy?
- Might be easier to coordinate resources in times of crisis, such as wars
- Governent can compsensate for market failure by reallocating resources.
- Societal inequality mat be reduced and society might maximise welfare rather than profit
- The abuse of monopoly power could be prevented
Planned Economy 1.2
What are the disadvantages of Planned Economy?
- Governemnts fail, as do markets, and they may not be fully informed for what to produce
- They may not meet consumer preferences
- It limits democracy
Mixed Economy 1.2
What is a Mixed Economy?
- Mixed Economy has features from of both planned and market economies and is the most common type of system today
- The market is controlled by both the governemetn and the forces of supply and demand
- Goverments often provide public goods e.g. street lights, roads, police, merit goods such as healthcare + education.
What to produce: Determined by both consumer and goverment preferences
How to produce it: Determined by producers making profits + governemnt
Whom to produce it: Both the goverment prefers and puchacing power of private individuals
Economic Efficiency: Productive + Allocative Efficiency 1.2
What is productive efficiency?
- Productive Efficiency occurs when resources are used to give the maximum possible output at the lowest possible cost
This helps maximise consumer welfare but it can be wasteful if the goods and services consumers want are not produced
Economic Efficiency: Productive + Allocative Efficiency 1.2
What is Allocative Efficiency?
- Allocative Efficiency occurs when resources are allocated to the best intrests of society where there is maximum social welfare and maximum utility
The goods and services consumers want might be produced where there is allocative efficiency, but they also need to be affordable. Productive Efficiency helps keeps the PRICE DOWN
