Ch. 2

• What is resource allocation?

  The way in which a society’s productive assets are deployed across their alternative uses
• What is a market economy?


  Market forces are allowed to guide the allocation of resources within a society
• What is a centrally planned economy?


  The government guides resource allocation within a society
• What is a mixed economy?


  A combination of market forces and government intervention guides the allocation of resources within a society
• What is capitalism?


  A system of production in which there is private ownership of productive resources
• What does the term "invisible hand" refer to?


  The way in which resources are allocated in a market economy, as described by Adam Smith
• What is specialisation?

  The process of concentrating on a task or activity in order to become expert in it
• What is the division of labour?

  A process whereby the production procedure is broken down into a sequence of stages, and workers are assigned to particular stages
• What is a market?

  A set of arrangements that allows transactions to take place
• What is a barter system?

  An economy without money where transactions in goods and services rely on direct exchange
• Why are incentives important in economics?

  They influence how economic agents respond and make decisions
• How do consumers typically respond to lower prices?

  By increasing demand
• How do firms typically respond to higher profits?

  By increasing supply
• What is the assumption about economic agents in relation to incentives?

  They react rationally to incentives to achieve their objectives
• What should be analyzed regarding economic agents and incentives?

  What an economic agent should do based on the given incentives
• What is the role of the government in a planned economy?

  The government controls the factors of production and decides on the allocation of resources
• How does a mixed economy function?

  A combination of market forces and government policies decides the allocation of resources
• What influences which goods and services are controlled by the government in a mixed economy?

  The will of the people, government objectives, and the availability of resources
• How does specialisation contribute to efficient resource allocation?

  It allows factors of production to be specialised to make them more efficient
• What is the benefit of dividing complex tasks into smaller tasks in a firm?

  It allows workers to become experts in their specific tasks, making the process quicker and more efficient
• What is the significance of markets in resource allocation?

  Markets bring together potential buyers and sellers, with prices acting as a key signal
• How do prices signal information to firms in a market?

  If a firm cannot sell its output at the chosen price, it indicates how buyers perceive the product
• What is the function of money as a medium of exchange?

  It enables transactions to take place
• Why did barter systems develop?

  To allow producers to specialise and gain the benefits of specialisation
• What is an example of a barter system?

  A farmer exchanging carrots for potatoes and meat
• How do planned economies differ from market economies?

  In planned economies, the government controls resource allocation, while in market economies, it is determined by supply and demand
• What are the advantages of a mixed economy?

  It combines the benefits of both planned and market economies
• How does specialisation help address the problem of scarcity?

  By allowing individuals to become experts, leading to increased efficiency and productivity
• What factors influence the allocation of resources in a mixed economy?

  The will of the people, government objectives, and the availability of resources
• What is the impact of government objectives on resource allocation?

  They determine which goods and services are considered beneficial and may require control
• How does the availability of resources affect economic systems?

  It influences how goods and services are controlled and allocated
• What is the significance of the division of labour in production?

  It allows for increased efficiency by enabling workers to specialize in specific tasks
• How does the division of labour relate to specialisation?

  Division of labour allows workers to specialize in smaller tasks, enhancing overall productivity
• What is the role of the government in a mixed economy?

  The government intervenes in certain sectors while allowing market forces to operate in others
• How do market economies respond to changes in consumer demand?

  By adjusting prices and supply based on the interaction of supply and demand
• What is the relationship between prices and resource allocation in a market economy?

  Prices signal information to buyers and sellers, influencing resource allocation decisions
• How does the barter system facilitate specialisation?

  It allows producers to exchange goods and services, enabling them to specialise in their production
• What are the implications of using a barter system in modern economies?

  Barter systems can limit the efficiency of trade and complicate transactions
• What are the key differences between planned, market, and mixed economies?

  • Planned Economy: Government controls factors of production and resource allocation.
  • Market Economy: Resource allocation is determined by supply and demand.
  • Mixed Economy: Combination of market forces and government policies decides resource allocation.
• What are the advantages and disadvantages of a mixed economy?

  Advantages:

  • Combines benefits of both planned and market economies.
  • Allows for government intervention in essential services.

  
  

  Disadvantages:

  • Potential for inefficiency due to conflicting objectives.
  • Risk of government overreach in markets.