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1、 Brian Titley 2012: this may be reproduced for class use solely for the purchasers institutePre-IB Economics 2.1 Economic systemsS2Pre-IB Economics Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute Resource allocation Because productive resources are scarce
2、relative to human wants we must decide:What to produce?How to produce?Who to produce for?Should we use resources to produce as many consumer goods as possible or allocate some resources, for example, to build new roads or to provide better health care? What tools and machinery will be needed? How ma
3、ny workers will be required and what skills will they need? Is it cheaper to employ more labour or more machinery?Should people in the greatest need get the goods and services they require? Or should they be produced for people who can pay the most for them? What price should they pay?Pre-IB Economi
4、cs Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute Economic systemsWho 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?Market economyMixed economyPlanned econom
5、yWho? Private sector firms and consumersHow?The price mechanismWho?Private sector firms and consumers, and a governmentHow?The price mechanism andgovernment planningWho?GovernmentHow?Government planningPre-IB Economics Brian Titley 2012: this may be reproduced for class use solely for the purchasers
6、 institute Economic systems China North KoreaDenmarkFranceItalySwedenUKMany developed economiesArgentinaMauritiusNepalParaguayBahamasSingaporePre-IB Economics Cuba Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute The free market economic system Private sect
7、or producersConsumersGoods and servicesMoneyProductionExchangeConsumptionIn 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-I
8、B Economics Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute 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 an
9、d services to maximize their profitsConsumers consume goods and services to maximize their utility (satisfaction)As consumer demand for a product risesProduction becomes more profitable, so producers increase outputProduction becomes less profitable, so producers reduce outputMarket price and quanti
10、ty tradedMARKET PRICE RISESMARKET PRICE FALLSAs consumer demand for a product fallsPre-IB Economics Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute Whats good about the free market system? A wide variety of goods and services will be produced to satisfy co
11、nsumer wantsFirms respond quickly to changes in consumer wants and spending patternsThe profit motive of firms encourages them to develop new products and use the most efficient methods of productionThere are no taxesProfits can be increased by increasing sales and/or reducing costs of production If
12、 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 in a totally free market economic systemPre-IB Economics Brian Titley 2012: this may be reproduced for class use solely f
13、or the purchasers institute 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 activitiesFirms will only produce goods and services if they are prof
14、itableFirms will only supply products to consumers who are able to pay for themResources will only be employed if it is profitable to do soNATIONAL PARKPre-IB Economics Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute How the market system can fail Market f
15、ailure: 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 activitiesHarmful goods may be produced if it is profitable to do soSome producers and consumers may ignore the harmful effects of their acti
16、vities on others and the environmentSome firms may restrict competition, mislead consumers and charge them very high pricesPre-IB Economics Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute The mixed economic system In a mixed economy a government can interv
17、ene in different markets in an attempt to correct the worst market failures:It can provide useful and essential goods and servicesIt can provide goods and services for people in the greatest needIt can employ people in public sector organizations and provide financial support to private sector firms
18、 to boost output and employmentIt can outlaw the production of harmful goods and dangerous activitiesIt can outlaw business practices that restrict competition or mislead consumers Pre-IB Economics Brian Titley 2012: this may be reproduced for class use solely for the purchasers institute The mixed
19、economic system A mixed economy therefore combines the advantages of a market economic system with: government ownership and control of some scarce resourcesgovernment interventions to regulate the actions of private sector firms and consumers in some marketsPre-IB Economics Brian Titley 2012: this
20、may be reproduced for class use solely for the purchasers instituteGovernment intervention: some problems By correcting failures in some markets, a government may distort the allocation of resources and cause problems in others:X High taxes on people and firms can distort market price signals and re
21、duce work incentivesX Land regulations can increase production costs and therefore reduce the profitability and supply of some goods and servicesX Public sector organizations may be inefficient and produce poor-quality goods and services because they do not have to make a profitX Some government spending may be for political or even personal gainPre-IB Economics
