2.1 Economic Systems: Igcse /O Level Economics
2.1 Economic Systems: Igcse /O Level Economics
2.1 Economic Systems: Igcse /O Level Economics
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Resource allocation
Should we use resources What tools and machinery Should people in the
to produce as many will be needed? How greatest need get the
consumer goods as many workers will be goods and services they
possible or allocate some required and what skills require? Or should they be
resources, for example, to will they need? Is it produced for people who
build new roads or to cheaper to employ more can pay the most for
provide better health labour or more them? What price should
care? machinery? they pay?
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Economic systems
Who in an economy decides what goods and services to
produce, how to produce them and who to produce them for,
and how are these decisions are made?
How? How?
How?
The price mechanism The price mechanism and Government planning
government planning
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Economic systems
Money
In a free market economic system all decisions are taken by private sector
organizations and individuals. There is little or no role for government or a
public sector and therefore little or no taxation or public spending.
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The price mechanism
A market is any set of arrangements that brings together all the producers
and consumers of a good or service so that they can engage in exchange.
Consumers consume goods and services Private firms produce goods and services
to maximize their utility (satisfaction) to maximize their profits
As consumer demand for a product rises MARKET PRICE RISES Production becomes more profitable, so
producers increase output
As consumer demand for a product falls MARKET PRICE FALLS Production becomes less profitable,
so producers reduce output
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What’s good about the market system?
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How the market system can fail
Market failure: when free markets fail to produce goods and services that are
worthwhile or when the decisions of producers or consumers result in wasteful or
harmful activities
N A L PARK
NATIO
Firms will only produce Firms will only supply Resources will only be
goods and services if they products to consumers employed if it is profitable
are profitable who are able to pay for to do so
them
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How the market system can fail
Market failure: when free markets fail to produce goods and services that are
worthwhile or when the decisions of producers or consumers result in wasteful or
harmful activities
Harmful goods may be Some producers and Some firms may restrict
produced if it is profitable consumers may ignore competition, mislead
to do so the harmful effects of their consumers and charge
activities on others and them very high prices
the environment
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The mixed economic system
In a mixed economy a government can intervene in different markets in
an attempt to correct the worst market failures:
It can provide useful and essential goods and services
It can provide goods and services for people in the greatest need
It can employ people in public sector organizations and provide
financial support to private sector firms to boost output and employment
It can outlaw the production of harmful goods and dangerous activities
It can outlaw business practices that restrict competition or mislead
consumers
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The mixed economic system
A mixed economy therefore combines the advantages of a market economic
system with:
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How mixed?
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Government intervention: some problems
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