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1.4 - Resource Allocation in DIfferent Economic Systems (T)

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161 views

1.4 - Resource Allocation in DIfferent Economic Systems (T)

Resource Allocation detailed material

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CHIEMELA
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COURSE: AS LEVEL ECONOMICS (9708)

CHAPTER: 1 – Basic Economic Ideas and Resource Allocation

TOPIC: 1.4 – Resource Allocation in Different Economic Systems

Last edited:
August 2022

Dr. Sylvain Hours


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Outline
 1.4 - Resource allocation in different economic systems
 1.4.1 - Decision-making in market, planned and mixed economies
 1.4.2 - Resource allocation in these economic systems

Dr. Sylvain Hours


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Economic Systems R
REMINDERS

 An economy is a system which provides a solution to the


basic economic problem.

 In other words, an economic system must allocate resources


between producers, and final products between consumers,
in order to reach the highest possible level of satisfaction.

 To that end, an economic system must answer 3 fundamental


questions:

 What to produce

 How to produce

 For whom to produce Dr. Sylvain Hours


econdoctor.com
Economic Systems
 There are 3 main types of economic systems:

 Market economies

 Planned (or Command) economies

 Mixed economies

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Market Economy
 In a market economy, there is no government intervention,
resources are privately owned, and allocated by market forces (i.e.
the price mechanism).

 Nb: Even if there is no government intervention, the government needs


to provide a stable and secure environment for markets to work
effectively.

 Main advantages:
 The profit incentive encourages efficiency
 Wide variety of goods and services
 Competition keeps prices down, quality up, and it encourages innovation

 Main limitations:
 Market failures (i.e. when the market does not allocate resources in the best
possible way) caused by market powers, public goods, imperfect
information or externalities. Dr. Sylvain Hours
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 Higher levels of inequality
Command Economy
 In a command economy, resources are allocated by the
government.

 Nb: Usually, natural resources as well as capital goods are owned by


the government.

 Main advantages:
 Low level of inequality
 No market failures (i.e. the government aims at maximising social
welfare)
 Low unemployment & high job security

 Main limitations:
 Absence of competition leading to a low productive efficiency and
product quality, to low incentives to innovate, to high prices and to a
narrow range of goods and services.
Dr. Sylvain Hours
 Government intervention is costly (e.g. operational costs which are econdoctor.com
usually high due to bureaucratic red tape), and it can be misguided (e.g.
Mixed Economy
 In a mixed economy, resources are jointly allocated by
market forces (i.e. the price mechanism), and by the
government.

 In particular, the government may intervene in the economy for


2 primary purposes:

 To correct market failures

 To reduce inequalities

 Therefore, a mixed economy benefits from the main


advantages of a market economy, and it has the potential to
overcome its main limitations.

Dr. Sylvain Hours


 However, as was the case in a command economy, government econdoctor.com
intervention is costly, and it can be misguided.
Mixed Economy
 Today, nearly all countries in the world are mixed economies.

 Obviously, the extent to which the government intervenes in the


economy varies across countries or regions.

 On the one hand, the economies of North Korea, Venezuela &


Cuba are very close to a planned economy.

 On the other hand, the economies of Hong Kong SAR &


Singapore are very close to a market economy.

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Transition Economy
 A transition economy is one in which government intervention
is gradually reduced.

 In other words, it is an economic system which “moves away” from


a command economy “towards” a market economy.

 How to reduce government intervention: (see Chapter 3)

 Privatisation

 Deregulation

 Reduction in taxes (including tariffs) and subsidies

 Removal of price controls and quotas


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Main Issues of Transition Economies
 Rising inequality

 Greater exposure to market failures

 Higher unemployment (i.e. the increase in competition combined


with the removal of government support leads to bankruptcies
and job cuts), greater job insecurity, and lower wages.

 Larger trade deficits (i.e. domestic products may not be


internationally competitive yet). (see Chapter 4)

 Lack of entrepreneurship skills & insufficiently developed


financial markets

 Higher inflation (i.e. as price ceilings are removed). (see Chapter Dr. Sylvain Hours
3 & 4) econdoctor.com
Economic Structure
 The economic structure describes to the way in which an
economy is organised in terms of sectors.

 The primary sector refers to all economic activities that exploit


natural resources (e.g. fishing, forestry, oil extraction, quarrying,
coal mining, etc.)

 The secondary or manufacturing sector includes all


manufacturing and construction industries (e.g. food processing,
textile, vehicle manufacturing, electronics, construction, etc.)

 The tertiary or service sector covers all service industries (e.g.


retailing, transport, logistics, banking, insurance, tourism, sport &
leisure, financial services, health, etc.)

 The quaternary sector includes all information-based or


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knowledge-oriented products and services (e.g. ICT, media, econdoctor.com
R&D, education, etc.)
Economic Structure
 The public sector is the part of the economy owned, managed
and controlled by the government.

 The private sector is the part of the economy owned, managed


and controlled by individuals and private companies.

 In a market economy, there is no public sector.

 In a command economy, there is no private sector.

 In a mixed economy, both sectors coexist.

 In a transition economy, the public sector gradually shrinks, and Dr. Sylvain Hours
the private sector gradually expands. econdoctor.com

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