1.2 - The Allocation of Resources

• What is an incentive?


  Something that motivates ab action, such as profit, prices and social welfare.
• What is a basic economic assumption with incentives?


  That economic agents respond to them, which is likely to be true.
• Are economic incentives the only forces that act on decision making?


  No
• What does the effect of the incentive depend on?


  • Size of the incentive.
  • Timescale.
  • Type of good/service.
  • Objectives of economic agents.
  • Other changes in the market/economy.
• What is a market economy?


  Market forces are allowed to guid the allocation of resources in a society without intervention from the government.
• What are the advantages of a market economy?


  • Efficiency: products of best value will be the only ones in demand.
  • Entrepreneurship: rewards for good ideas can make a lot of money.
  • Choice: incentives for innovation lead to an increase in choice.
• What are the disadvantages of a market economy?


  • Inequalities: anyone unable to work receives no income.
  • Non-profitable goods aren't made.
  • Monopolies: market dominance can be abused.
  • Missing markets: public goods won't be provided as they're not profitable.
  • Market failures: may be over/under consumption.
• What is a planned/command economy?


  The government undertakes the coordination role by planning/directing the allocation of resources.
• What are the advantages of a planned/command economy?


  • Maximise welfare: they can prevent inequality and redistribute income fairly.
  • Low unemployment: the government provides jobs.
  • Prevent monopolies.
• What are the disadvantages in a planned/command economy?


  • Poor decision making: the government might not be fully informed/ could be corrupt.
  • Restricted choice: consumers have a limited choice as firms can't control what they produce.
  • Lack of risk taking: firms don't have an incentive to increase efficiency, take risks or innovate as they don't need to make a profit.
• What is a mixed economy?


  When both government and market play a role in allocating resources.

  • Public sector = the government.
  • Private sector = businesses that are privately owned.
• What are 2 key aspects of efficiency that determine whether or not markets are working effectively?

  • Productive efficiency
  • Allocative efficiency
• What is productive efficiency?

  It occurs when a firm is operating at minimum cost and producing the maximum output possible from an appropriate combination of inputs.
• How is productive efficiency shown on a diagram?

  Points on a PPF curve - eg point A/B

  
• What is allocative efficiency?

  It's achieved when society is producing the appropraite bundle of goods and services relative to consumer preferences.
• What is economic efficiency?

  When an economy is both productively and allocatively efficient.