Micro Topic 2: The Allocation of Resources

Q: What does resource allocation mean?

A: Resource allocation refers to the process of deciding how limited resources (land, labor, capital, and enterprise) are distributed to produce goods and services.

Q: What is public sector in terms of resource allocation?

A: The public sector refers to the part of the economy that is controlled and operated by the government.

Q: What is the private sector in terms of resource allocation?

A: The private sector refers to the part of the economy that is owned and operated by private individuals or businesses.

Q: What is demand-side economics?

A: Demand-side economics focuses on stimulating consumer demand as the primary driver of economic growth, often through government spending or tax cuts. It emphasizes the importance of increasing demand to boost production and economic activity.

Q: What is supply-side economics?

A: Supply-side economics focuses on increasing production by improving the supply of labor, capital, and technology, often through tax cuts and deregulation. It aims to create a favorable environment for businesses to invest, producing goods and services, and ultimately driving economic growth.

Q: What is a market failure?

A: A market failure occurs when the free market fails to allocate resources efficiently, leading to negative outcomes such as externalities or inequality. This can result in overproduction or underproduction of goods and services, necessitating government intervention to correct the imbalance.

Q: What causes market failure?

A: Causes of market failure include externalities, public goods, information failure, monopoly power, and income inequality.

Q: What is a public good?

A: A public good is a good that is non-excludable and non-rivalrous, meaning that people cannot be excluded from using it, and one person’s use doesn’t reduce availability for others (e.g., clean air, national defense).

Q: What is a private good?

A: A private good is a good that is excludable and rivalrous, meaning people can be excluded from using it, and consumption by one person reduces availability for others (e.g., food, clothing).

Q: What is a merit good?

A: A merit good is a good that is under-consumed and often leads to positive externalities (e.g., education, healthcare), which the government may encourage through subsidies.

Q: What is a demerit good?

A: A demerit good is a good that is over-consumed and leads to negative externalities (e.g., cigarettes, alcohol), which the government may seek to reduce through taxes or regulations.

Q: What is an externality?

A: An externality is a side effect or consequence of an economic activity that affects third parties, either positively (positive externality) or negatively (negative externality).

Q: What is a positive externality?

A: A positive externality occurs when the actions of individuals or businesses result in benefits to third parties (e.g., vaccination, education).

Q: What is a negative externality?

A: A negative externality occurs when the actions of individuals or businesses result in harm or costs to third parties (e.g., pollution, smoking).

Q: What is government intervention in resource allocation?

A: Government intervention refers to the actions taken by the government to correct market failures, regulate industries, or redistribute resources to achieve social goals (e.g., taxes, subsidies, price controls).

Q: What is taxation as a form of government intervention?

Q: What is taxation as a form of government intervention?

Q: What is subsidy in resource allocation?

A: A subsidy is a government payment to encourage the production or consumption of certain goods (e.g., renewable energy, public transport).

Q: What are price controls?

A: Price controls are government-imposed limits on the prices that can be charged for goods and services (e.g., minimum wage, maximum price).

Q: What is a price ceiling?

A: A price ceiling is a maximum price set by the government that can be charged for a good or service, intended to make goods more affordable (e.g., rent controls).

Q: What is a price floor?

A: A price floor is a minimum price set by the government, intended to ensure producers receive a fair price (e.g., minimum wage, agricultural price floors).

Q: What is market equilibrium?

A: Market equilibrium is the point where supply equals demand, meaning the quantity supplied matches the quantity demanded at a given price.

Q: What is the role of prices in resource allocation?

A: Prices act as signals in the market, allocating resources by encouraging production where demand is high and discouraging production where demand is low.

Q: What is consumer sovereignty?

A: Consumer sovereignty is the idea that consumers’ preferences and purchasing decisions determine what goods and services are produced in the market.

Q: What is productive efficiency?

A: Productive efficiency occurs when goods and services are produced at the lowest possible cost, maximizing the use of resources.

Q: What is allocative efficiency?

A: Allocative efficiency occurs when resources are distributed in a way that maximizes overall satisfaction in society, meaning the value of goods produced equals the value consumers place on them.

Q: What is the role of markets in allocating resources?

A: Markets allocate resources by responding to price signals, where prices are determined by the interaction of supply and demand.