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Section 1 - Economic problem - PPFs and Market economies - Coggle Diagram
Section 1 - Economic problem - PPFs and Market economies
PPF Basics
Production possibility frontiers
Show the maximum amounts of two goods or services an economy can produce
Points within or on the PPF are achievable without using extra resources
Points on the PPF are only achievable when resources are used as efficiently as possible, these points are productively efficient
Points that lie outside the PPF are unnachievable
Economic growth
If the total amount of resources increased, then the total possible output of that economy would also increased, PPF shifts outward
Improved technology/ labour can allow for more output
Outward shifts show economic growth
Fewer total resources available can lead to PPF shrinking inwards as total possible output has decreased
Reasons for outward shifts
Better tecnhology
New natural resources
Higher productivity of workers
Reasons for inward shifts
Natural disasters
Large scale outward migration
Resource depletion - usage of resources at a faster rate than they're replenished
Opportunity cost
Producers use it to look at the profit foregone by not making an alternative product
government use it to look at the lost value to society from the polices they chose not to inforce
Problems
Not all alternatives are known
May be a lack of information on alternatives
Some factros can be hard to switch to an alternative use
The cost of a choice measured in the next best alternative that's given up
Consumers use it to chose what to spend their income on
Markets
Free market economy
Allocates resources based on supply and demand and the price mechanism
Pros
Efficiency - Only the best value products will be in demand, firms have an incentive to make goods in the most efficient way
Entrepreneurship - Money is the reward for risk taking an innovation, so these are encouraged
Choice - Consumers aren't restricted to buying only what the government recommends and have plenty of choice
Cons
Inequality - huge differences in income can arise and anyone who isn't able to work won'y receive money
Non profitable goods might not be made - medical goods that don't sell enough to make profit wouldn't be made
Monopolies - successful businesses might become the only supplier of a product
Command economy
Governments decide how resources should be allocated
Pros
Maximize welfare - inequality can be prevented and income can be distributed fairly, goods that are beneficial are ensured to be produced
Low unemployment - everyone can be provided with a job
Prevent monopolies - government is able to prevent them
Cons
Poor decisions - governments might make poor decisions
Restricted choice - consumers have limited choice in what they consumer and firms are told what to make
Lack of risk taking and efficiency - government-owned firms have no incentive to increase efficiency, take risks or innovate as they don't need to make a profit
Mixed
Has a public and a private sector
Organisations that are owned by the government make up the private sector
Voluntary sector - Includes charities and other non-profit organisations
Organisations that are privately owned are the private sector
Economic thinkers
Adam Smith
Believer in the free market
Described the invisible hand that would allocate resources in society's best interests
Consumers and producers are motivated by self interest, consumers maximize benefits and products maximize profits
In order for the free market to work, they couldn't be an monopolies, and there needed to be low barriers of entry to maximize competition
Specialization and division of labour
Karl Marx
Argued the free market created a situation where small ruling class of producers dominated and exploited working class wage earners
Workers would eventually control production and everyone would have a share in ownership of resources
Led to the rise of communism
Friedrich Hayek
Supporter of free market system
Governments shouldn't intervene to allocate resources as they lack enough information of allocate them beneficially
Individual consumers have the best knowledge of what they want/ need, so allocation should be left to them and the price mechanism
Saw the price mechanism as a way for producers/ consumers to communicate (signalling device)
Price level set by supply and demand would show what consumers and producers wanted and will naturally allocate resources