100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
Previously searched by you
Basic Economic Ideas and Resource Allocation Chapter 1: Introducing economies (PPC graphs in separate notes) AS Level Economics (9708)$0.17
Add to cart
Basic Economic Ideas and Resource Allocation
Chapter 1: Introducing economies
(PPC graphs in separate notes)
AS Level Economics (9708)
The basic economic problem
We have unlimited wants and limited resources. This creates scarcity and therefore not
all wants and needs can be satisfied. We are then forced to make a choice. This gives
rise to opportunity cost.
Opportunity cost: the cost of a choice is the value of the next best alternative forgone.
Examples of opportunity cost: the government needs to choose between investing in
education and healthcare. If the government chooses to invest in healthcare there is an
opportunity cost of education.
Scarcity: A situation that arises because people are faced with unlimited wants but have
limited resources.
The coordination problem
The problem associated with bringing different economic activities to produce economic
value. In other words, these are the complications that arise when deciding which type
of economy (free market, mixed, planned) to implement.
To help with the coordination problem we ask the three economic questions:
1. What to produce
2. How to produce it
3. For whom to produce
Free market economy: Market forces are allowed to guide the allocation of resources
within a society.
Economic questions in a free market:
1. What to produce: Determined by consumer preferences
2. How to produce it: As producers aim to make a profit, producers will attempt to
produce the good at a low cost
3. For whom to produce: Whoever has the greatest purchasing power
Advantages and disadvantages of a free market
, Advantages
● Firms are likely to be efficient because they produce goods demanded by
consumers
● There is no government intervention
Disadvantages
● Only benefits the wealthy
● Allows for the creation of monopolies, which exploit the market by overpricing
goods
● Overconsumption of demerit goods
● Public service goods such as police services are not provided in a free market
Planned economy: The government allocates all scarce resources in an economy
where there is greater need.
Economic questions to in a planned economy:
1. What to produce: Determined by government preference
2. How to Produce: Produced by government and government employees
3. For whom to produce: Government decides whom its produced for
Advantages and disadvantages of a planned economy
Advantages
● Easier to control resources in a time of crisis such as war
● Government can compensate for market failures by reallocating resources
● Ensures that everyone has basic needs met
● Reduces inequality
● Abuse of monopoly power can be prevented
Disadvantages
● Limits democracy and personal freedom
● Does not cater to consumer preferences
● Government failure
Mixed economy: resources allocated partly through price signals and partly on the basis
of direction by government.
Economic questions in a mixed economy
1. What to produce: Determined by both consumer and government preference
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller wendanyanda. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $0.17. You're not tied to anything after your purchase.
