AP ECONOMICS Topic : Mixed economy | features, advantages and disadvantages

Mixed Economy

A mixed economy is an economic system that incorporates aspects of more than one economic system. This usually means an economy that contains both privately-owned and state-owned enterprises or that combines elements of capitalism and socialism, or a mix of market economy and planned economy characteristics. This system overcomes the disadvantages of both the market and planned economic systems.

Features

• Resources are owned both by the government as well as private individuals. i.e. co-existence of both public sector and private sector.
• Market forces prevail but are closely monitored by the government.

Advantages

• Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government.
• Social cost of business activities may be reduced by carrying out cost-benefit analysis by the government.
• As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government.
• Monopolies may be existing but under close supervision of the government.

AP ECONOMIC Topic : What is an economic system

What is an Economic System?

Because of the fact that there is scarcity of resources and unlimited wants, it is always a problem to allocate resources in an efficient manner. We are constantly facing three basic questions. These are:

• What to produce?
• How to produce?
• For whom do we produce?

Every community or country must choose and develop its own way of solving these problems. The way a country decides what to produce, how to produce and for whom to produce is called it Economic System.
The three Economic Systems existing are:

• Market Economic system
• Planned Economic System
• Mixed Economic System

Note:

• There are no PURE command economies
• There are no PURE market economies
• Instead there is a continuum of different characteristics

What happens when countries move from command economy to market economy?

CHARACTERISTIC		COMMAND ECONOMY		MARKET ECONOMY
Ownership of resources:	From:	government ownership	To:	private ownership
Decision making:	From:	centrally planned	To:	by the market
Motivation:	From:	"the social good"	To:	self interest and profit
Prices and Wages:	From:	set by the government often distorted	To:	set by the market change with market
Result:	From:	inefficiency full employment low inflation low standard of living shortages more equal distrib	To:	economic efficiency periods of unemploy. periods of inflation high standard of living wide range available less equal distrib.
Problems:	From:	corruption=self interest lack of incentives (the incentive problem) distorted prices (the coordination problem) inefficiency	To:	monopoly= inefficiency inequality changing prices instability (UE, IN) pollution
OVERALL:	From:	LESS FOR MORE (INEFFICIENT) and a lower standard of living	To:	MORE FOR LESS (EFFICIENT) and a higher standard of living

AP ECONOMICS Topic : Budget Line

The Budget Line

Consumer’s choices are limited by the budget available. Total spending for goods and services can fall short of the budget constraint but may not exceed it.
Suppose a college student, Rocky, wants to go in for Music classes and Karate classes. A day spent pursuing either activity costs $50. Suppose she has $250 available to spend on these two activities each semester.

The budget line shows combinations of the Music classes and Karate classes Rocky could consume if the price of each activity is $50 and she has $250 available for them each semester. The slope of this budget line is -1, the negative of the price of Music classes divided by the price of Karate classes
For a consumer who buys only two goods, the budget constraint can be shown with a budget line. A budget line shows graphically the combinations of two goods a consumer can buy with a given budget.
As the Price of karate classes will fall relative to Music classes, Rocky will substitute Karate classes for Music Classes. This is known as the substitution effect of a price change.

 

AP ECONOMICS Topic : Equi-marginal Principle

Equi-Marginal Principle

The Law of Equi-Marginal Utility is an extension to the law of diminishing marginal utility. The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services.
This law states that how a consumer allocates his money income between various goods so as to obtain maximum satisfaction.
Let us assume there are only three commodities available in the market, A, B and C. Also assume that Tom has a daily income of only $15 to spend and that he can exactly order his utility preference for each of the three products. Product A costs $1 per unit, Product B costs $3 per unit and Product C costs $5. Note that diminishing marginal utility sets in immediately for each of the three products. Marginal utility information is described on per $ basis, because a consumers choice are influenced not only by the amount of additional utility that successive units give him but also how many dollars he give up to get them.
Let us consider each dollar spent. Marginal utility per dollar shows that one dollar spend on Product A provides the highest satisfaction of 20 utils as opposed to only 12 and 8 utils from products B and C, respectively.
Second dollar spends again buys the highest utility of 15 utils. However, when Tom spends the third dollar, a switch to Product B promises 15 utils of added satisfaction as opposed to 11 utils from Product A. Following the principle, the best combination Tom can purchase with $15 would be 4 units of A, 2 units of B and 1 unit of C. The total utility generated would be 154 utils. $4 spent on A give 54 utils of satisfaction; $6 spent on Product B gives 60 utils and $5 spent on C gives 40 utils. This gives a total of 154 utils. No other combination will result in as high utility as this with an expenditure of $15.

The results from the table above can be generalised to n commodities and the following condition should hold in equilibrium:

AP ECONOMICS Topic : Ceteris paribus

C?ter?s paribus is a Latin phrase, literally translated as "with other things the same." It is commonly rendered in English as "all other things being equal."

In economics, theoretical models are build on the basis of ceteris paribus in order to test and illlustrate various theories.

When using ceteris paribus in economics, assume all other variables except those under immediate consideration are held constant. For example, it can be predicted that if the price of beef decreases—ceteris paribus—the quantity of beef demanded by buyers will increase. In this example, the clause is used to operationally describe everything surrounding the relationship between both the price and the quantity demanded of an ordinary good.

AP ECONOMICS Topic : Production Possibility Curve

Production Possibility Curve/Production Possibility Boundary/Production Possibility Frontier

From the point of view of an Economy, there is an opportunity cost of using its resources. Production Possibility curve (PPC) shows the maximum combinations of goods and services that can be produced by an economy in a given time period with its limited resources.

In the graph, if all the resources are used to produce Schools then there will be no Hospitals. If you move to the other end then all the resources would be used to produce Hospitals and not Schools will be there in the economy. Government has to move along this curve and decide the best possible combination of goods to produce. For example Z, shows the possible combinations of School buildings and Hospitals. Thus, it is impossible to build more Schools without also building fewer Hospitals.

Resources have to be switched from building more Hosipitals to building more Schools. This is known as rellocation of resources. Before the rellocation of resources we will have to consider the costs of rellocating these resources between uses. This costs will include retraining cost of our workforce and the time consumed in this rellocation.

Any point outside the curve is unattainable unless there is an outward shift of the PPC. This can only be possible if there is an improvement in the quantity and/or quality of factors of production. This is known as economic growth. It is a process of increasing the economy’s ability to produce goods and services.

AP ECONOMICS Topic : Law of diminishing marginal utility

What is Utility?

Why do you buy the goods and services you do? It must be because they provide you with satisfaction—you feel better off because you have purchased them. Economists call this satisfaction utility. The concept of utility is an elusive one. A person who consumes a good such as peaches gains utility from eating the peaches. But we cannot measure this utility the same way we can measure a peach’s weight or calorie content. There is no scale we can use to determine the quantity of utility a peach generates.

Total Utility

If we could measure utility, total utility would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. The higher a consumer’s total utility, the greater that consumer’s level of satisfaction.

Marginal Utility

The amount by which total utility rises with consumption of an additional unit of a good, service, or activity, all other things unchanged, is marginal utility.

Law of diminishing Marginal Utility

Suppose that you are really thirsty and you decide to consume a soft drink. Consuming the drink increases your utility, probably by a lot. Suppose now you have another. That second drink probably increases your utility by less than the first. A third would increase your utility by still less. This tendency of marginal utility to decline beyond some level of consumption during a period is called the law of diminishing marginal utility . Failure of marginal utility to diminish would lead to extraordinary levels of consumption of a single good to the exclusion of all others. Since we do not observe that happening, it seems reasonable to assume that marginal utility falls beyond some level of consumption.