Basic economic ideas

1. The next best alternative given up
   1. Economic systems

      Nota:

      • Mechanisms for answering the 3 fundamental economic qs of what to produce, how to produce it and for whom...
      1. 1 Market System

         Nota:

         • Pure market systems are free of government intervention Price mechanism is how the 3 Qs are answered Consumer sovereign Price acts as a signal, rationing device and incentive and can transfer preference  Firms respond to increased demand to achieve profits Invisible hand Assumption is consumers aim to maximise utility Has no public goods and under-provision of merit goods and over-provision of demerit. Externalities occur
      2. 2 Centrally planned

         Nota:

         • 100% government influence and the 3 Qs are attempted to be answered by them. Failed experiments in Soviet Union and China - Communist Government decides what, how and for whom the produce goes to meaning no consumer or producer sovereignty. Profit is not an objective Factories get production targets
         1. 3 Mixed

            Nota:

            • Blend of market and planned economies. Quantity varies massively Most economies are mixed Most efficient as benefits of both government intervention as well as market forces. Correcting externalities (tax/subsidy) and provide public goods. Disadvantage is in terms of politics and economics of government - how much intervention is best for society - this is massively disagreed upon
         2. Advantages -

            Nota:

            • From each according to ability, to each according to need. Equality No profit so not exploitation
         3. Disadvantages

            Nota:

            • Bureaucratic SLow decisions Unequal Government does not/cannot know what everyone needs Laziness and low productivity as no profit incentive Easy for corruption
      3. Issues of transition from planned to mixed

         Nota:

         • Potentially unemployment Inflation due to price adjustments Increased freedom is new, culturally people need to change Skills and efficiencies need to develop Time is needed to develop markets  Risk is uncomfortable and less likely initially Government micro management needs to reduce to allow market forces to take over - difficult
2. PPC
3. Pareto optimal

   Nota:

   • Noone can be made worse off when improving the situation for another

Nota:

• Land - Rent Labour - Wages/salaries Capital - Interest  Enterprise - Profit