Types Of Economies and Rational Decision Making

Question 1

What is a free market economy

Answer 1

Resources are automatically allocated without any need for government intervention and everyone acts in self interest

Question 2

Benefits of the free market (4)

Answer 2

-no need for gov decisions
-no expensive central planning
-people work hard due to incentives
-competition keeps prices low and quality high

Question 3

Problem of the free market (4)

Answer 3

-lack of equality
-firms may act in a socially undesirable way
-some merit goods may not be produced
-competition is often limited

Question 4

What is a mixed economy

Answer 4

Where resources are allocated partly by government and partly by the free market

Question 5

What is a command economy

Answer 5

Where resources are allocated by the government

Question 6

Benefits of a command economy (3)

Answer 6

-prioritise equality
-ensure production of merit goods
-direct resources towards long term goals

Question 7

Problems of a command economy (3)

Answer 7

-goods may fall in quality as no competition between firms
-reduced incentive for hard work
-loss of liberty

Question 8

What does rational decision making assume

Answer 8

That economic agents have full info regarding choices they make and fully weigh up costs and benefits to maximise utility

Question 9

What is marginal utility

Answer 9

The additional satisfaction a consumer gains from consuming one additional unit

Question 10

What is diminishing marginal utility

Answer 10

When the additional unit consumed adds less to total utility than the previous unit consumed