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32 Cards in this Set
- Front
- Back
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4 Economic Systems |
Market system Planned system Mixed system Traditional System |
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Market system |
Market economy is an economy where resources are allocated by the price mechanism, the consumers determines what is produced. Example:United States |
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Advantages of market system |
Price determination by supply and demand Choice is available in the market There is efficiency Buyers are free to buy any product/high satsifaction Low prices due to efficiency |
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Disadvantages of market system |
The profitable goods and services are produced, people do not get the products they need (education, health). Mistreatment of workers Creates unemployment Huge gap between rich and poor Big firms control the whole market |
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Planned system |
Planned system is an economic system where resources are allocated by the, the state determines what is going to be produced. Example:USSR |
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Advantages of Planned system |
Wasteful competition is avoided Goods and services like health and education are provided Even distribution of income Little uncertainty over career choice |
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Disadvantages of Planned system |
Lack of efficiency/ no incentives No choice for the consumers Poor quality goods, shortages |
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Mixed system |
An economy where both private sector and government operate and play a key role. It is also referred to as an economy which is the sum of the advantages of market and planned system |
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Advantages of mixed system |
Choice for consumers Government providing essential services Example: Postal services, army, street lighting |
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Disadvantages of mixed system |
It consists of the disadvantages of private sector and government Unnecessary government interference Government monopolies' Private sector monopoly Wasteful resources |
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Principle of equilibrium price |
The equilibrium price is the price where demand and supply are equal. Equilibrium is defined to the price-quantity pair where the quantity demanded is equal to the quantity supplied, represented by the intersection of the demand and supply curves. |
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Causes of changes in demand |
Change in price of a compliment good Change in price for substitutes Change in income Change in the number of consumers Change in information/technology Change in seasons Advertisements Taste and Fashion |
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Causes of changes in supply |
Change in input costs Change in technology Change in number of supplies Change in taxation policies (taxes cause increase in production costs, supply shifts inward) Disasters and calamities/season Price of complementary goods Business confidence Fashion |
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Price elasticity of demand |
Responsiveness of the quantity demanded of a good or service to a change in its price. |
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PED |
% change in quantity demanded ------------------------------------------------- % change in price |
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Price elasticity of supply |
Responsiveness of the quantity supplied of a good or service to a change in its price. |
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Inelasticity and elasticity |
Inelastic: Change in Quantity Demanded < Change in price Elastic: Change in Quantity Demanded > Change in Price |
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Factors influencing PED |
Advertising Luxury/Necessity Goods of Habit Availability of close substitutes Percentage of income |
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Factors influencing PES |
Time: Momentary period is fixed (straight line). Price inelastic in the short run (can only in fluence one FOP). Price elastic in the long run (influences all FOP). Availability of recources |
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Usefulness of price elasticity |
The government can use price elasticity to decide on which product, tax can be levied.If government puts tax on a product with inelastic demand the revenue will increase as the consumer will be prepared to buy the product at a higher price (cigarettes) Taxes -> Increase in market price |
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Concept of market failure |
Market failure is when the market forces do not perform the way they expected to. A situation in which the allocation of goods and services is not efficient. |
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Reasons for market failure |
Imperfect information Factor immobility Affected parties ignored Non-profitable goods not produced (necessities) Improper allocation of resources Social injustice |
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Merits of market system |
Consumer is sovereign Efficiency Specialization will promote increased production |
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Negative externatlity |
Imposes external costs on other people and organisations that didn't agree to the action that caused it. |
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Private and External Costs and Benefits |
Private cost: the cost which the consumer has to bear Private benefit: the benefit which the consumer enjoys External cost: the cost which the general public bears without consuming External benefit: the benefit which the general public enjoys without consuming |
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Private costs and social costs |
Private costs + external costs = social costs Private benefits + external benefits = social benefits |
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Conserving resources versus using resourcesFactors |
The need for money The standard of living Opportunity to earn money because of global demand of products Comparative advantage |
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Public expenditure versus Private expenditure |
Public expenditure: The government does not exploit resources and maintains sustainability Private expenditure: The private companies exploit the resources to earn maximum profit |
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Merit Goods |
A product that society values and judges that everyone should have regardless of whether an individual wants them. Positive externality. Examples: Health care, museums, education |
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De-merit Goods |
Products that society devalues and judges to have negative externalities. Examples: Cigarettes, alcohol, guns, cars |
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Government response to de-merit goods |
Laws to ban it Regulations Taxation - Reduces consumer demand/makes them less profitable for a producer Education )propaganda_ |
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Government response to merit goods |
Make it compulsory Regulation Education Subsidies |
