1.2 Allocation of resources

• Allocative efficiency - When resources are allocated to the best interests of society when there is maximum social welfare and maximum utility.
• Economic efficiency- when resources are allocated optimally, so every consumer benefits and waste is minimised
• Incentive - something which motivates an individual to make a decision and behave a certain way.
• Market Economy - An economy where the market mechanism allocates resources so consumers make decisions about what is produced.
• Maximisation - Consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible.
• Mixed economy - Both the free market mechanism and the government allocate resources.
• Planned economy - all factors of production are allocated by the state, so they decide what, how and for whom to produce goods.
• Productive efficiency - When resources are used to give the maximum possible output at the lowest possible cost; MC=AC
• Resource allocation - How resources are distributed among producers and how goods and services are distributed among consumers.
• Advantages of a Planned Economy.

  > Government can focus on where they are most needed in the economy.

  > Prices can be controlled so most in need can access goods or services

  > Fewer resources are wasted on duplicating goods or services

  > There can be less inequality of income and wealth.
• Advantages of a Mixed Economy:

  > The government can decide which resources to control.

  > Markets forces can be used for goods and services that are considered less important.
• Advantages of a Market Economy:

  > Having multiple businesses all competing against one another is likely to lead to lower average costs.

  > Competition between firms can lead to greater efficiency - firms focus on the areas in which they can be most efficient.

  > Firms are more likely to innovate when there is a profit incentive

  > People have an incentive to work in order to earn money to purchase goods and services
• Which goods and services are controlled by the government/market force depends on:

  > The will of the people - different political systems around the world prioritise different goods and services

  > Government objectives - Some goods and services are considered particularly beneficial to a society

  > The availability of resources in a particular economy - If there is a lack of space in a city the government will have to use rent controls to control the price of accommodation