HL Economics

Chapter 1: The Foundations of Economics

1 (a) ‘Economics is primarily concerned with the allocation of scarce resources which have alternative uses’. Use a production possibility curve to explain this statement.

Economics is the essential way in which it includes the production, consumption, and allocating of wealth. The production possibility curve (PPC) shows the maximum amount that country could produce with the resources they have. Anything outside of the PPC is not possible since the country lacks resources that could reach that point. The allocation, distribution, of the scarce, limited resource that is highly desired, resources are based on how the country plans to use the resources. For a perfect country, the point will be placed right in between the two resources, displaying how the country is maintaining an equal balance between, the most basic example of, weapons and food. Although we know that there are no countries that have the perfect balance between the two scarce resources. Looking at the PPC diagram above, point A has made a transfer to point B, which shows the increase in the production of computers (or power) and less of food. The computers also represents the power in which the country could hold with more consumptions of the resource. Yet this would mean that the country is paying less attention to the citizens of the country, providing less health care or food to help the people.

(b) Discuss the view that government is more effective in the allocation of scarce resources than the free market.  Allocation of the scarce resources are more effective by the government rather than the free market because most governments will wish to distribute these limited resources equally amongst the people in the country. On the other hand, free markets let consumer’s have the freedom to obtain what and how much they want of the resource causing the resources to be allocated inefficiently and unevenly. When the government is in control of the allocation, they could plan and perform strict restrictions on the amount of the limited resource each person could obtain. Because of this, it is very likely that most people of the country would consume at least some of those scarce resources, unlike in free markets where it is highly possible that the rich people would obtain more of the resource where as others will consume less or even none of the resource. For example, if the government was allocating the scare resources of timber to make houses, they would state a specific amount of resource available for a certain amount of people. Since the supply is set, the demand is limited but that does not mean the demand  for the resource by the consumers will be set within that range.  As for the market, they could provide as much of these resources as they want. Although some may say the market has a faster reaction to the changes and resource availability, it has a higher possibility of going bankrupt, which could lead to the loss of many employees.


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