Resource Allocation and Economic Systems - AP Microeconomics
- What is the invisible hand?
- The unseen forces that move the free market economy. Adam Smith's concept of self-interest guiding efficient market outcomes.
- Which economic system combines elements of market and command economies?
- Mixed economy. Uses both market mechanisms and government planning for allocation.
- Identify the primary economic systems.
- Traditional, Command, Market, Mixed. These represent the four main ways societies organize production and distribution.
- What is the role of government in a market economy?
- Minimal, mainly to enforce laws and protect property rights. Government provides framework but avoids direct economic control.
- What is the primary goal of economic efficiency?
- Maximize output with given resources. Achieve maximum production from available resources without waste.
- Identify a policy tool for correcting negative externalities.
- Pigovian tax. Tax on activities that create negative externalities to reduce them.
- Describe a traditional economy.
- A traditional economy is based on customs, history, and time-honored beliefs. Decisions follow established cultural practices passed down generations.
- Which economic system is most likely to promote innovation?
- Market economy. Competition and profit incentives drive entrepreneurship and creativity.
- Which economic system is most likely to have public ownership of resources?
- Command economy. Government typically owns and controls major industries and resources.
- Identify one factor that can shift a PPF outward.
- Technological advancement. Improves productivity, allowing more output from same inputs.
- What is the primary function of money in an economy?
- Medium of exchange. Facilitates trade by eliminating need for direct barter.
- What is the main disadvantage of a command economy?
- Lack of incentives for productivity and innovation. Without profit motive, workers and managers lack efficiency incentives.
- Identify the main advantage of a command economy.
- It can quickly mobilize resources. Central control enables coordinated response to national priorities.
- What characterizes a command economy?
- In a command economy, the government makes all economic decisions. Central planners control what, how, and for whom goods are produced.
- Which economic system uses central planning?
- Command economy. Government agencies coordinate all production and distribution decisions.
- In which system are prices most flexible?
- Market economy. Supply and demand forces allow rapid price adjustments.
- What is the definition of an economic system?
- An economic system is an organized way a society allocates resources and distributes goods and services. Shows how societies decide who gets what, when, and how.
- Which system encourages consumer sovereignty?
- Market economy. Consumer demand directly influences production decisions through prices.
- How does a mixed economy allocate resources?
- Through both market forces and government intervention. Combines price signals with government regulation and planning.
- What is a Production Possibility Frontier (PPF)?
- A curve depicting maximum feasible amounts of two products that a nation can produce. Shows trade-offs between different production possibilities given resources.
- Which economic system is based on supply and demand?
- Market economy. Price mechanism coordinates production and consumption decisions.
- What does a point inside the PPF indicate?
- Inefficient resource use. Resources are not being used to their full potential.
- What is the main disadvantage of a market economy?
- It can result in economic inequalities. Income distribution depends on market success rather than need.
- State one advantage of a traditional economy.
- Stability and predictability. Established patterns provide security and reduce uncertainty.
- Define consumer sovereignty.
- The power of consumers to decide what gets produced. Consumer choices determine which goods and services are produced.
- Identify a consequence of an economic system with no private property.
- Lack of individual incentives. People have no personal stake in improving productivity or efficiency.
- What role do prices play in a market economy?
- Prices signal resource allocation. Higher prices indicate greater demand or lower supply for resources.
- What is an externality?
- An externality is a consequence of an economic activity experienced by unrelated third parties. Costs imposed on others not involved in the economic transaction.
- State the formula for calculating opportunity cost.
- Opportunity Cost = Next Best Alternative Foregone. The value of the best alternative choice that must be given up.