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1、.,Pre-IB Economics,2.1 Economic systems,S2,Pre-IB Economics,.,Resource allocation,Because productive resources are scarce relative to human wants we must decide:,Pre-IB Economics,.,Economic systems,Who in an economy decides what goods and services to produce, how to produce them and who to produce t
2、hem for, and how are these decisions are made?,Pre-IB Economics,.,Economic systems,China,North Korea,Denmark France Italy Sweden UK Many developed economies,Argentina Mauritius Nepal Paraguay,Bahamas Singapore,Pre-IB Economics,Cuba,.,The free market economic system,Private sector producers,Consumers
3、,Goods and services,Money,Production,Exchange,Consumption,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.,Pre-IB Economics,.,
4、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.,Private firms produce goods and services to maximize their profits,Consumers consume goods and services to maximize their utility (sa
5、tisfaction),As consumer demand for a product rises,Production becomes more profitable, so producers increase output,Production becomes less profitable, so producers reduce output,Market price and quantity traded,MARKET PRICE RISES,MARKET PRICE FALLS,As consumer demand for a product falls,Pre-IB Econ
6、omics,.,Whats good about the free market system?,A wide variety of goods and services will be produced to satisfy consumer wants Firms respond quickly to changes in consumer wants and spending patterns The profit motive of firms encourages them to develop new products and use the most efficient meth
7、ods of production There are no taxes,Profits can be increased by increasing sales and/or reducing costs of production,If consumer demand is rising, prices will rise and production becomes more profitable. Entrepreneurs will allocate resources to their most profitable uses,There is no public sector i
8、n a totally free market economic system,Pre-IB Economics,.,How the free 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,NATIONAL PARK,Pre-IB Econom
9、ics,.,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,Pre-IB Economics,.,The mixed economic system,In a mixed economy a government can inte
10、rvene 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
11、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,Pre-IB Economics,.,The mixed economic system,A mixed economy therefore combines the advantages of a market econo
12、mic system with:,Pre-IB Economics,.,Government intervention: some problems,By correcting failures in some markets, a government may distort the allocation of resources and cause problems in others: High taxes on people and firms can distort market price signals and reduce work incentives Land regula
13、tions can increase production costs and therefore reduce the profitability and supply of some goods and services Public sector organizations may be inefficient and produce poor-quality goods and services because they do not have to make a profit Some government spending may be for political or even personal gain,Pre-IB Economics,
