Chapter 2 The Allocation of resources
Þ choosing what/ when/ how to produce goods and services
involves decision making – economic system
2.1 Economic system
Þ 2. 1.1 Economy
Þ people and firms produce, exchange and consumer goods
and services in an economy
Þ some economies have access to more resources than
others but all have far fewer resources then they require to
satisfy all the needs and wants of their populations
Þ every economy must therefore decide what goods and
services to produce, how to produce and who to produce
them for – problem of resource allocation
Þ 2.1.2 Decision making
Þ There are many different solutions to the problem of
resource allocation
2.2 Different economic systems
Planned Economic system;
Þ Most decisions about the goods and services sector
organizations., these organizations are owned, controlled by
the government. Very few private sector businesses.
Þ Main problem all goods and services produced are those the
government wants. What people have not always what they
want.
Market Economic system;
, Þ All decisions are taken by the private sector organizations
and individuals. No role for government.
Mixed Economic system;
Þ No totally free markets or planned. Generally, a combo of
both.
Þ Ownership is split between private and public sectors.
- less government More government –
Market Mixed Planned
economy economy
The Market Economic System
Þ A market is any set of arrangement that brings together all
the producers and consumers of any good or service so they
can exchange.
Þ All the resources in a market economy are privately owned
by people and firms, with the aim of a profit.
Goods bought-selling price=profit
Þ Make profit by moving scarce resources away from
producing things that consumers are unable or unwilling to
pay.
Þ The more money a consumer spends on a product, it is
increased profits, increased product availability.
Þ Price mechanism; guides decisions on products and price.
Þ Advantages
Þ A variety of goods are produced therefore, increase
competitiveness.
Þ Quick response to consumer trends therefore Increase
profitability on goods and demand.
, Þ Development of new goods. Therefore, it is an incentive to
develop new goods for profit.
Þ Disadvantages
Þ Goods are only produced if profitable.
Þ Goods supplied only to those who can afford it.
Þ Harmful goods may be produced with people ignoring the
effect it has.
Þ Certain firms may dominate called monopolies.
The Mixed Economic System
Þ Combines government planning and ownership of resources
with use of the free market economic system to determine
the allocation of resources.
Þ A mixed economy overcomes issues in the free market
through government intervention and regulation.
Þ Disadvantages
Þ Taxes can distort market price signals and reduce work
incentives.
Þ Laws and regulations can increase production costs and
reduce the supply of goods and services.
Þ Public sector firms may be inefficient.
Þ Some government spending may be political or for personal
gain.
Þ The size of a mixed economy is measured by the sum of its
public sector and private sector outputs, income or
expenses.
Þ choosing what/ when/ how to produce goods and services
involves decision making – economic system
2.1 Economic system
Þ 2. 1.1 Economy
Þ people and firms produce, exchange and consumer goods
and services in an economy
Þ some economies have access to more resources than
others but all have far fewer resources then they require to
satisfy all the needs and wants of their populations
Þ every economy must therefore decide what goods and
services to produce, how to produce and who to produce
them for – problem of resource allocation
Þ 2.1.2 Decision making
Þ There are many different solutions to the problem of
resource allocation
2.2 Different economic systems
Planned Economic system;
Þ Most decisions about the goods and services sector
organizations., these organizations are owned, controlled by
the government. Very few private sector businesses.
Þ Main problem all goods and services produced are those the
government wants. What people have not always what they
want.
Market Economic system;
, Þ All decisions are taken by the private sector organizations
and individuals. No role for government.
Mixed Economic system;
Þ No totally free markets or planned. Generally, a combo of
both.
Þ Ownership is split between private and public sectors.
- less government More government –
Market Mixed Planned
economy economy
The Market Economic System
Þ A market is any set of arrangement that brings together all
the producers and consumers of any good or service so they
can exchange.
Þ All the resources in a market economy are privately owned
by people and firms, with the aim of a profit.
Goods bought-selling price=profit
Þ Make profit by moving scarce resources away from
producing things that consumers are unable or unwilling to
pay.
Þ The more money a consumer spends on a product, it is
increased profits, increased product availability.
Þ Price mechanism; guides decisions on products and price.
Þ Advantages
Þ A variety of goods are produced therefore, increase
competitiveness.
Þ Quick response to consumer trends therefore Increase
profitability on goods and demand.
, Þ Development of new goods. Therefore, it is an incentive to
develop new goods for profit.
Þ Disadvantages
Þ Goods are only produced if profitable.
Þ Goods supplied only to those who can afford it.
Þ Harmful goods may be produced with people ignoring the
effect it has.
Þ Certain firms may dominate called monopolies.
The Mixed Economic System
Þ Combines government planning and ownership of resources
with use of the free market economic system to determine
the allocation of resources.
Þ A mixed economy overcomes issues in the free market
through government intervention and regulation.
Þ Disadvantages
Þ Taxes can distort market price signals and reduce work
incentives.
Þ Laws and regulations can increase production costs and
reduce the supply of goods and services.
Þ Public sector firms may be inefficient.
Þ Some government spending may be political or for personal
gain.
Þ The size of a mixed economy is measured by the sum of its
public sector and private sector outputs, income or
expenses.
