Sunday, May 22, 2022

IGCSE Economics (Microeconomics) – Market economy VS Planned economy || Resource allocation

Hey welcome to index world another video in the igcse economics series this video is going to be about the different economic systems and we also understand briefly the resource allocation decisions that have to be taken in an economy so first we will understand the different types of economic systems .

The economic systems can be the market economy the planned economy or the mixed economy after that we will understand the advantages and disadvantages of the market economic system then the advantages and disadvantages of planned economic system or the command economic system .

And finally we will see what questions have to be answered when resources have to be allocated when decisions regarding resource allocations have to be made so an economic system describes the way in which econo the economy is run the economy is organized who owns the resources who controls the resources and how the decisions .

Regarding resource allocation are made or how they are taken so the types of economic systems the first is the market economy wherein all the resources are owned privately by private individuals and the decisions about resource allocation are also done by the private individuals in the .

Economy and there is no government interference in the economy the second type of economic system is the planned economic system or also known as the command economic system where all the decisions are taken by the government because the resources are also owned and controlled by the government .

So the government decides about the resource allocation how the resources are to be used and for whom they have to be used and finally we have the mixed economic system which is obviously the economic system that is most commonly found around the world wherein the private players and the .

Government co-exist the resources are owned and controlled by the private players but there is also government interference to a certain extent wherever the government feels they have to interfere they will interfere for the benefit of the society the degree of government interference .

Will differ from economy to economy so in some countries government interference can be very minimal but in some countries government interference can be extremely high so let's understand the advantages and disadvantages of market economy meaning when resources are owned and controlled by private players .

What advantages an economy can face and what disadvantages an economy can face so talking about the advantages the first advantage is the efficiency with which the resources are utilized this is because the private players always work for profit their only motive is profit so when the only motive is profit .

They will make sure that they do not waste their resources they will make sure that the resources are utilized to their best potential the second advantage is that the consumer demand is the center of all resource allocation decisions it means producers or private players will produce and sell .

What the consumers demand what the consumers want this is good from the consumer's point of view they will be able to consume the goods they actually want to consume and because of this they will also be able to enjoy a good standard of living good standard of living means they will .

Be able to consume variety of goods and services that they actually want to consume and lastly there are no taxes the incomes that the person receives there are no taxes on the income the profits that the corporates earn no taxes on them the entire income the entire profits .

Can be spent the salaried individuals can spend them on purchasing goods and services the firms or the corporates can use the profits to reinvest in the business and grow their business so no taxes is also one of the advantages of a market economy system talking about the disadvantages the .

Public or married goods are not produced so these type of goods are not produced in a market economy so what do you mean by public good and what do you mean by merit good public goods are goods that are non-rival and non-excludable so because of these two features of the .

Public goods a price cannot be charged for such goods and hence no private player would be interested in producing them and selling them but these goods are also important for a society to consume and at the same time merit goods are also goods which are underproduced or under .

Consumed in an economy but from the society welfare point of view these goods are also very important so since these goods are either not produced or under produced by a private economy this is a disadvantage for the market economy second there would be harmful effects on .

The environment because a private producer is only concerned about profits in order to earn profits if they have to harm the environment if they have to misuse the resources they will do so and that is not good for the society it could be harmful for the society as far as the health effects are concerned .

Or the society may have to live a poor quality of life then maybe pollution there may be traffic congestion and so on resources may be left idle by the private producers if they feel that the resources are not profitable or the resources cannot be put to a .

Profitable use so if we have a set of labor whom they feel that cannot be used and the goods cannot be sold profitably these resources or the set of labor will be kept idle they will be kept unemployed by the private producers this is bad for the society because .

These set of people the set of labor who will be unemployed they will not be able to earn income and live a decent quality of life and lastly there is wasteful competition in a market economy because private producers in order to promote their goods and sell their own goods they will indulge into wasteful .

Competition they will indulge into advertisement so the resources that are actually spent in competing or advertising those resources can be used to produce some other goods and services which will lead to more satisfaction of wants of other members of this society .

So i hope these points are clear now let's go and understand the advantages and disadvantages of a public economy where the government is in control the advantage of a public economy is there is economies of scale so what is the economies of scale economics of scale is a situation where when goods are produced in bulk quantities the .

Average cost of production reduces now this is true anywhere if you do an activity at a larger scale if you produce goods in bulk if you sell goods in bulk you are bound to reduce your average cost of production overall the cost of production will fall for example .

If you go and buy goods for resale in bulk quantities you are definitely bound to receive discounts by the supplier so this will apply to all aspects of the business and when the government produces goods for the entire economy they will be able to reduce the cost of .

Production this reduced cost of production will translate into lower selling prices for the consumers and ultimately the society will benefit the second advantage is equality or you could say there would be minimum inequality in distribution of income and wealth because the government will treat the entire society .

As same as equals so they will produce the same set of goods for all members of the society they would not differentiate between the rich and the poor so that way everyone in the society is consuming the same set of goods the same quality of products and there is more equality .

In a planned economy compared to a market economy no wastage of resources the government is not indulging in wasteful competition there is no competition in fact so all the resources can be utilized in product production of maximum goods and services that the people can consume coming to .

The disadvantages there would be lack of choices for the consumers the consumer's demand is not kept in mind the government when the government is in control of resources they will try to fulfill their aims their economic aims and not think about individual members of the society so for example if the .

Government aim is to achieve society equality they will produce the same set of goods for all members of the society irrespective of the fact that some people may not want to consume that particular good or they want they may want a different variation or a different version of the good .

But the government will not produce those goods another aim of the government could be to minimize pollution so they will not produce the goods and services that would lead to high pollution that way the consumers lose out on consumption of such goods and services the second disadvantage is inefficiency .

See the government is not trying to maximize profit it does not have an aim of achieving maximum profit so when the aim is not to maximize profit there is bound to be inefficiency in utilization of resources for example if a job can be done by two people the government might .

Employ three people or four people but this is not true in case of a market economy a private producer will try to minimize the cost by utilizing minimum possible resources for any production activity third is the low standard of living obviously i told you consumers demand .

Is not the center of production activity so consumers will not be able to consume all the goods that they want to consume overall the quality of life the standard of living will be low of the people in the society and the last disadvantage is bureaucracy see when the government is in control of the resources they might take decisions .

That will benefit the individual members of the government departments and not the society as a whole and nothing can be done about it because the resources are under government control so these are the two important types of economic systems and the third one is .

The mixed economic system i told you the degree of government intervention could vary from economic to economy and so the advantages and disadvantages in every economy could be different where the government interference is very high you would see more advantages and disadvantages of the planned economy .

In that mixed economy and vice versa and finally we have arrived at the resource allocation decisions see when allocating resources certain basic questions have to be answered in order to produce the goods and services the first is what to produce what kind of goods will be produced or what kind of goods .

Should be produced to satisfy the consumer wants if the decision is in hands of private producers in a market economy they would try to produce the goods and services which the consumers want for which they are willing to pay maximum selling prices so that the producers can make .

Maximum profit but if the decision is to be taken by the government they would decide based on their economic aims for example equality i told you they would want to minimize pollution they might want to increase their exports reduce their imports and there would be different .

Other economic aims that the government may have to achieve so this question would be answered based on individual economic aims of the government next question that has to be answered is how to produce when once you've decided that .

This particular good has to be produced there could be multiple ways of producing the product the factors of production could be used in multiple permutations and combinations so every producer whether private or government will have to answer for example one could use more of labor .

Less of capital one could use more of capital less of labor so if the decision is in hands of the private player the decision would depend on which production method is cost effective so the private producer will decide .

Based on the cost of production if the labor is cheap the goods would be produced using most labor and least capital but if the capital is cheap the goods would be produced using most capital and least labor but in case of government the government again .

Will decide based on the economic aims it wants to achieve for example if the aim of the government is to achieve maximum employment or full employment even if the capital is cheap the government will still try to employ most labor .

And not capital and not try to minimize its cost because the its aim is not to maximize profit but to achieve full employment and finally the last question that has to be answered is for whom to produce the goods have to be produced for whom a private producer in a market economy .

Would obviously produce the goods for a person who has the capability of paying a price for those goods so private producer may decide to produce luxury products for extremely rich people or a private producer may decide to produce basic necessities for poor people who can who can afford the basic necessities .

But people who cannot afford the basic necessities will not get the goods and services in the market economy whereas in a planned economy the government will produce for the society it will not differentiate between the rich and poor it will try to produce for the entire .

Society so again this decision would depend on the economic aims to be achieved by the government so i hope this explanation about the different economic systems and the resource allocation decisions in each of these systems is clear .

So if you enjoyed the video please like the video please share the video with your friends do not forget to subscribe to this channel in the next few weeks i'm going to come up with a lot of videos on economics i hope you will enjoy them thank you for being there


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