The role of markets in allocating resources(Chapter 6)

Question 1

Definition of the resource allocation problem

Answer 1

Deciding how best to allocate limited resources to different productive uses

Question 2

The three main economic questions to solve this problem

Answer 2

What to produce, How to produce, for whom to produce

Question 3

Different types of economic systems (Definition , Advantages, Disadvantages)

Answer 3

Market economic system

Definition
This economic system relies on the market forces of demand and supply to allocate resources, with minimal government intervention.

Adv.
-Efficiency
-Freedom of choice
-Incentives

Disadv.
-Environmental issues
-Income and wealth inequality
-Social hardship
-Wasteful competition

Planned economic system

Definition
This economic system relies on the government allocating resources. It is often associated with a communist political system that strives for social equality.

Adv.
- Economies of scale
-Prevent wastages
-Social equality
-Social protection
-Employment of resources

Disadv.
-Lack of economic freedom
-Lack of incentives

mixed economy

Definition
It is a combination of the planned and market economic system, with some resources being owned and controlled by private individuals and firms whilst others are owned and controlled by the government in the public sector.

Adv.
The govt can:
- provide public goods, necessities and merit goods and private business can provide the most demanded goods (superior goods).
- will keep externalities, monopolies, harmful goods, etc. In control.
- provide jobs in the public sector
- provide financial help to collapsing private organizations

Disadv.
-Govt. taxes will be imposed, which will raise prices and reduce work incentives.
-Govt. laws and regulations can increase production costs and reduce production.
-Public sector organizations may still be inefficient and will produce low quality goods and services.
-Personal Gain of the government

Question 4

What is a Market?

Answer 4

Any place that brings together all the producer and consumers of a good or service(producers and sellers that are willing and able to sell and buy that product).

Question 5

Market outcomes(Equilibrium/disequilibrium)

Answer 5

Market equilibrium -
When producers are willing and able to supply using their FOP and its exactly equal to the quantity consumers are willing and able to buy.

Market disequilibrium -
When the quantity producer are willing and able to supply is less than the quantity consumer are willing and able to buy.

Question 6

Price mechanism

Answer 6

How private firms and consumers interact determines how scarce resources are allocated between competing uses. It determines what goods and services are produced, how they are produced and who they are produces for in a market economy.

Price mechanism-

1. Signal: to consumers and producers to make decisions
2. Incentives: When the price of a product rises the quantity supplied increases and this is due to the incentive function, producer are given incentive(the price) to produce more.
3. Ration: When a resource is scarce, its price reflects the relative value placed on it by consumers. Higher prices indicate greater consumer demand and therefore a higher value for the resource. As resources are allocated to the uses with the highest willingness to pay, the market ensures that the resource is directed to where it is most valued.

Question 7

Ceteris paribus

Answer 7

If there’s an increase in the price of a good and all other factors stay constant, then the demand for that good will decrease. It means ‘all other things remain unchanged’.