Year 1 micro - different types of markets

Question 1

what is a market economy

Answer 1

an economy where the private sector owns all resources in the economy and allocates goods and services through the market mechanism

Question 2

what is a command economy

Answer 2

an economic system where all decisions about how to allocate resources are made by the government

Question 3

what is a mixed economy

Answer 3

an economic system that allows for some government intervention where the market fails to allocate resources efficiently

Question 4

market economy vs command

Answer 4

• profit motive in market, welfare maximisation in command
• high freedom of choice in market, lower in command
• competition higher in free market
• role of government low in free market
• variety and quality of goods and services higher in market
• quicker respond to demand in market economies, slow in command
• more inefficient in command
• merit goods are under provided and demerit goods are overprovided, compared to command
• under provision of public goods in market economy
• higher income inequality in market
• monopolies in market economy, none in command

Question 5

why is the quality and variety of goods and services higher in a market economy

Answer 5

• there’s a high incentive to maximise profits and produce goods and services that consumers want/need
• so they will want to produce a variety of goods to satisfy consumers

Question 6

What is a free market?

Answer 6

Any place where buyers meet sellers to exchange goods and services, free from government intervention

Question 7

what happens at allocative efficiency

Answer 7

• resources perfectly follow consumer demand
• society surplus if maximised
• net social benefit is maximised

Question 8

pros of free market economy

Answer 8

• at equilibrium, we will get allocative efficiency
• will never get long run disequilibrium as the functions of price will mean that any excess/shortages will not exist
• encouraged competition, prices are low, consumer surplus is high, quantity and choice is high
• dynamic efficiency and investment
• job creation and economic growth because quantity is high. as labour is a derived demand, increased demand increases employment
• increases freedom, liberty, choice due to lack of govt intervention
• no risk of governemnt failure as there’s no govt intervention

Question 9

cons of free market economy

Answer 9

• markets can fail, allocative efficient not guaranteed
• we assume that there are no barriers to entry, that there are many sellers who are competitive, this may not be the case, monopolies
• there may be imperfect information, and consumers may not make rational decisions
• externalities may be ignored due to the profit motive
• inequity given inequality , may exclude many consumers from accessing /affording price of goods, bad if the food is a necessity
• excessive profiteering, firms could be maximising profit in a way that is bad for society
• creative destruction, new firms joining the market could destroy pre existing firms, could lead to higher unemployment
• prices can be highly volatile, especially in agricultural and commodity market, demand and supply highly inelastic, high prices , burden on consumer, low prices , burden on producers

Question 10

What is specialisation?

Answer 10

The concentration of production on a narrow range of goods or services

Question 11

advantages of specialisation

Answer 11

• higher output, as resources are going to be purely focused on efficient production, which increases trade and growth, higher incomes and higher employment
• wider range of goods/services eg Dyson are a technology company but produce a wide variety of hairdryers, vacuum cleaners etc
• greater allocative efficiency- resources will go to companies/regions who are more efficient at producing and taken away from inefficient production
• greater productivity - workers are used better, used to their maximum productive potential, higher productivity will lower firms COP and can be passed on consumers via lower prices

Question 12

disadvantages of specialisation

Answer 12

• finite resources , companies or countries that are overspecialised and require a certain input in their production like oil, what happens if oil is depleted? collapse of business
• change in fashion/tastes - overspecialised businesses that haven’t diversified may be at risk
• if foreign firms become more efficient than another industry abroad, the original industry will de industrialise, higher unemployment rates
• international relations issues may cause trade to be blocked off, specialisation inefficient

Question 13

for specialisation to work, what needs to happen

Answer 13

• there needs to be mutually beneficial trade, countries need to be able to export their surplus of goods/services that they are efficient at producing and import those that they are inefficient at producing

Question 14

what is division of labour

Answer 14

breaking down the production process into separate tasks upon specialisation

Question 15

advantages of division of labour and specialisation

Answer 15

1.increased productivity
- division of labour allows workers to focus on specific tasks, developing specialised skills and increasing their efficiency in that task
- higher productivity boosts total output, reducing production costs and potentially lowering prices for consumers, making products more accessible

2. time savings
   - by dividing tasks, workers avoid the time lost in switching between tasks, which enhances work flow and reduces downtime
   - faster production cycles allow firms to increase output and meet demand more efficiently, leading to quicker delivery and higher customer satisfaction
3. Skill development
   - specialisation enables workers to build an expertise in a single task, leading to higher quality and precision in their work
   - improved skill levels result in better quality goods and a more reliable production process
4. Technological innovation
   - repetitive tasks encourage the development of new techniques and machinery to simplify work, as workers and managers identify efficiencies
   - innovation in processes and technology reduces costs, further enhancing productivity and leading to more advanced and competitive products
5. efficient use of resources
   - workers focusing on specialised tasks reduce waste of time, effort, and materials, achieving greater efficiency with the resources at hand
   - efficient resource use optimises output, conserves resources, and allows firms to reinvest savings into other areas

Question 16

disadvantages of division of labour and specialisation

Answer 16

1. alienation
   - repetitive, specialised tasks can lead to worker boredom and dissatisfaction, they may feel disconnected from the overall production process
   - this can reduce motivation, lower productivity, and increase turnover, potentially raising recruitment and training costs for firms
2. loss of skill flexibility
   - focusing on one narrow task reduces workers adaptability and limits their ability to adapt to diverse roles
   - in a rapidly changing market, businesses may struggle with a workforce lacking broad skills, making it harder to adapt to new processes or product changes, may lead to structural unemployment
3. Potential for over reliance on automation
   - specialisation can often encourage automation, reducing job opportunities and increasing workers’ risk of job losses in favour of machines
   - over reliance on automation can limit job security, harming workers and potentially reducing the firms responsiveness to changes that require human flexibility and oversight

Question 17

what are primary commodities

Answer 17

essential materials for economic activity, eg wheat, rice, copper, oil, gas

Question 18

why are prices of primary commodities so volatile?

Answer 18

• PED and PES very price ineslastic, demand is inelastic because a lot of these commodities are necessities and there are no good substitutes available, PES is because there is a large production time lag involves. its also hard to store these
• there are regular demand and supply shifts. eg weather shifts supply and global growth affects demand

Question 19

is price volatility an issue, why or why not

Answer 19

• depends on whether price goes up or down
• if prices go up, producers income, revenue will rise as ped is inelastic
• if prices fall, revenue and profitability etc will come down, in a developing country this may mean aboslute poverty for producers
  
  • the revenue from price commodities could often provide big government revenue through tax. decrease price means less govt rev
  • export revenue will decrease impacting economic growth, may lead to a recession in countries who are dependent on revenues from primary commodities
  • lower incentive for producers to invest

Question 20

how do economists make a theory

Answer 20

• they observe consumer behaviour
• they form hypothesis
• they make predictions from hypothesis
• they use evidence to test predictions

Question 21

what is a positive statement

Answer 21

a statement which can be tested or backed up with evidence

Question 22

what are normative statements

Answer 22

opinionated statements based on value judgement