9708 · 1.4
Resource allocation in different economic systems flashcards
Revision flashcards for Cambridge 9708 Resource allocation in different economic systems (syllabus 1.4). Flip, recall, then mark a real past-paper question.
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How does a market economy allocate resources?
Through the price mechanism — consumer demand and producer supply signal what, how, and for whom to produce.
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How does a planned economy allocate resources?
Central authority sets output targets and directs resources — state ownership of key industries is common.
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What is a mixed economy?
Combines private markets with public sector provision — most modern economies are mixed.
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One strength of market allocation?
Efficiency via price signals and competition — resources flow to valued uses without central planning.
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One weakness of pure market allocation?
Market failure — public goods, externalities, and inequality may be ignored without government action.
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What is a transition economy?
An economy moving from planned toward market mechanisms — e.g. post-communist reforms.
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What is the 'price mechanism'?
The system in a market economy where the interaction of supply and demand determines the prices of goods and services. These prices act as signals and incentives that guide how scarce resources are allocated.
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Define 'consumer sovereignty'.
The power of consumers to determine what is produced. In a market economy, firms are motivated by profit to produce the goods and services that consumers are willing and able to buy.
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What is the primary reason for government intervention in a mixed economy?
To correct market failure. This includes providing public and merit goods, regulating monopolies, and controlling externalities to improve overall social welfare and resource allocation.
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What is the 'information problem' in a planned economy?
Central planners lack the detailed, real-time information about consumer preferences and production costs that is automatically conveyed through prices in a market economy. This leads to misallocation of resources, causing shortages and surpluses.
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Distinguish between the private sector and the public sector.
The private sector consists of individuals and firms owned by private individuals, driven by the profit motive. The public sector comprises organisations owned and controlled by the state, which aim to provide services and correct market failures.
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What is the 'invisible hand' concept, as described by Adam Smith?
The idea that individuals' pursuit of their own self-interest in a free market can lead to a socially desirable and efficient allocation of resources, as if guided by an 'invisible hand'.
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What is a 'merit good' and why might a government provide it?
A good that is considered socially desirable but would be under-consumed in a free market (e.g., education, healthcare). The government provides or subsidises it to increase consumption and correct for the positive externalities and information failure associated with it.
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What is 'allocative efficiency'?
A state of the economy where production represents consumer preferences; specifically, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.