Resource allocation in economic systems
Three economic systems
- An economic system decides how to allocate scarce resources.
- market economy — firms and people own resources; prices decide. Government does little.
- planned (command) economy — the government owns resources and decides everything.
- mixed economy — a blend of private and public sectors. Almost every real country is mixed.
Practice
In a planned (command) economy:
A planned economy is government-controlled; a market economy lets prices decide.
The price mechanism
- In a market, prices do three jobs:
- signalling — a price shows where resources are wanted,
- incentive — a higher price rewards producers to supply more,
- rationing — a higher price shares a scarce good among those willing to pay.
Practice
Match each job of the price mechanism.
Prices signal, incentivise and ration in a market economy.
Comparing them
- market: choice, low prices, strong incentive — but a big rich–poor gap.
- planned: smaller gap, key goods for all — but weak incentive, shortages.
- mixed: keeps the good points of both — but the right balance is hard.
Practice
Almost every real economy is a mixed economy.
Real economies blend private and public sectors — they are mixed.
You've got it
Key idea
- market (prices decide) / planned (government decides) / mixed (both) — real economies are mixed
- the price mechanism: signalling, incentive, rationing
- market = choice but inequality; planned = equality but shortages