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G9 - Chapter 1 - Notes

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76 views3 pages

G9 - Chapter 1 - Notes

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Sei
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UNIT 1 – THE ALLOCATION OF RESOURCES

Chapter 1 – MARKET ECONOMIC SYSTEM

Economic systems

An economic system organises the economic activities of a region. Its purpose is to handle
the problem of scarcity. An economic system encompasses everything that governs
economic activity, from laws to institutions to accepted practices and behaviours.

Market economic system

A market economy is sometimes called a capitalist economy, a free-market economy or a


free enterprise economy because the decision making is motivated by what happens in
markets. In other words, the market price of an item determines who will get it. Those who
can afford to buy a resource will do so; those who can’t, won’t. In a pure market system, an
official economic decision maker is unnecessary.

The most critical feature of a market economy is the presence of competition. Competition
generally brings the lowest price, the best service and the best quality to consumers.
Furthermore, competition among employers attracts the best employees to the most
successful firms. If a market economy is to be effective, it must encourage competition.

In a market system, consumers and producers are free to choose what to produce and
consume, and in what quantity. The system is propagated by economic incentives, such as
the individual’s ability to improve his standard of living. Individuals and economic entities
voluntarily exchange resources, goods and services.

Private property is an important feature of a market system. In a pure market system,


individuals and private corporations own all the resources, goods and services. Individuals
are free to invest their resources however they like. Individuals make decisions about what
to produce and how to produce it. The system is profit-driven, so resource owners invest in
the things they expect to be most profitable.

Planned economic system

A planned economy is sometimes called a command economy, because decisions are made
by a central authority that works to fulfil an economic “plan.” The interest of “the plan”
precedes the private interests of the people. A central authority makes decisions about what
to produce, how to produce, and how to allocate the benefits of production. Both the
allocation of resources and the distribution of goods and services are determined by a
central authority, acting to fulfill “the plan.” In a typical planned system, all resources, goods
and services are owned by everyone (i.e. by the government) and controlled by a central
authority. In communism, the central authority tends to be totalitarian; in socialism, the
central authority may be a freely elected government or its representatives.
Allocative efficiency
allocative efficiency occurs when resources are allocated in a way that maximises consumer
satisfaction. This means that firms produce the product in the right quantity as per the
consumer demand. if the producers are producing more commodity than the demand, it will
create a surplus, which is a waste of resources and is inefficient. Here, the price mechanism
acts as a stabilising mechanism inorder to control the over production. Because of the
existence of a price mechanism in the market, the output price will fall and it will send the
signal to the producers to reduce the supply inorder to obtain gainful business.

The below graph shows the producer’s surplus. as the point Q touches the supply line at a
higher point where there is a huge gap between and demand.

The price mechanism in the market economic system makes the price as a signal to provide
adequate information to make the right decision about the consumption. so the consumers
will be making the consumption choice about the product based on the price signal. The
producers who act according to the price signal will be provided incentives. Those who are
reluctant to change will be driven out of the market. The below graph shows the inadequate
supply and excess demand which will eventually push the price up, which is considered to be
an inefficiency. The graph shows that the demand curve is much higher than the supply
curve, which is setting the output price at a higher level. even though the producers won't
be able to get any profit at that price.
The below graph shows the most efficient utilisation of resources. At the point where
demand and supply meet is the equilibrium point, which is equally beneficial for both the
consumer and producer. At this point, supply will be equivalent to demand.

Productive Efficiency

A firm is said to be productively efficient, it is using all the available resources in the
economy, and hence will be producing on the PPC. and if a firm is said to be productively
inefficient, it is not using all the resources in the economy, and hence will be producing at a
point inside the PPC.

Dynamic Efficiency

This arises when resources are used efficiently for a longer period of time. It is mostly seen
with those firms who introduce new methods of production or improved products.

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