1.2 Allocation of Resources

• What is the primary function of an economic system?

  To allocate scarce resources in an attempt to maximize social welfare.
• What are the three types of economic systems mentioned?

  • Pure Command Economy
  • Pure Market Economy
  • Mixed Economy
• How are resources allocated in a Pure Command Economy?

  Resources are allocated outside markets via a planning mechanism.
• How are resources allocated in a Pure Market Economy?

  The price mechanism allocates resources in markets.
• What characterizes a Mixed Economy?

  A Mixed Economy contains large market and non-market sectors.
• What is the difference between a Communist Economy and a Capitalist Economy?

  A Communist Economy has publicly owned means of production, while a Capitalist Economy has privately owned means of production.
• What is the main concern of economics according to the study material?

  Economics is concerned with choices required to solve the economic problem using scarce resources.
• What has contributed to the demise of many communist planned systems since the 1980s?

  The lack of incentives in a planned system has contributed to their demise.
• What are some reasons for the lack of incentives in planned systems?

  Planners lacked incentives to reallocate resources efficiently and improve production quality.
• How do market-based systems provide incentives?

  Market-based systems provide incentives via the price mechanism for producers and consumers.
• What is the problem of government failure in command economies?

  Government failure leads to inefficiencies in resource allocation over time.
• What is the ongoing debate in economics regarding resource allocation?

  The debate is about the extent to which markets should allocate resources and the role of government intervention.
• What is a market?

  A market is where buyers and sellers meet to trade goods and services.
• How do freely functioning markets operate?

  Freely functioning markets are decentralized and unorganized without a central authority Controlling the quantity of trade
• What determines the quantity traded in a freely functioning market?

  The quantity traded is determined without intervention by individual buyers and sellers.
• What are the three functions of market prices?

  1. Signalling function: Provides information about market conditions to buyers and sellers
  2. Incentive function: Creates incentives for decision-making And meeting objectives based on self-interest
  3. Rationing function: Allocates scarce resources to those who are most willing and able to pay.
• What types of markets exist in a market-based economy?

  There are product markets and factor markets in a market-based economy.
• How are resources allocated in a market economy?

  Resources are allocated by market forces.
• How are resources allocated in a planned economy?

  Resources are allocated by control by the state or government.
• How are resources allocated in a mixed economy?

  Resources are allocated partly by market forces and partly by the state.
• What is the objective of consumers in an economic system?

  Consumers derive utility from the consumption of goods and services.
• What do neo-classical economists assume about consumer behavior?

  They assume consumers make decisions to maximize their total utility.
• What happens to marginal utility as the price of a good increases?

  The value of marginal utility per £ spent falls as the price increases.
• What does the demand curve represent in relation to marginal utility?

  The demand curve represents the concept of diminishing marginal utility.
• What is the role of incentives in a market economy?

  Incentives influence the behavior of households and firms in their economic decisions.
• What are the key aspects of economic efficiency?

  • Productive efficiency: Resources are used to produce goods at the lowest cost.
  • Allocative efficiency: Resources are distributed according to consumer preferences.
• What will be discussed in the 2.4 Consumer Surplus and Producer Surplus content?

  It will evaluate the effectiveness of incentives on resource allocation.