Cambridge International as and a level Economics Ebook

Systems of resource allocation
Th
e problem of scarcity, which in turn requires choices to be 
made, is one that is common to all economies, rich and poor. 
Th
e choices that are made and which can realistically be 
made are determined by the 
economic system 
of a particular 
country. Th
is term is used to describe the means or allocative 
mechanism by which its people, businesses and government 
make choices. Traditionally, economists have recognised 
three distinct types of economic system – these are the 
market economy
, the 
command 
or 
planned economy
and 
the 
mixed economy
. Let us briefl y consider each in turn.
Economic system: 
the means by which choices are made 
in an economy.
Market economy: 
one where most decisions are taken 
through market forces.
Command 
or
 planned economy: 
one where resource 
allocation decisions are taken by a central body.
Mixed economy: 
one where market forces and 
government, private and public sectors are involved in 
resource allocation decisions.
KEY TERMS
Economic structure: 
the way in which an economy is 
organised in terms of sectors.
KEY TERM
20
Cambridge International AS Level Economics

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Scarcity and choice: 
The key concept of scarcity and 
choice applies in all types of economy. How choices 
are made depends on the relative importance of the 
government and the free market mechanism.
KEY CONCEPT LINK
The market economy
In a market economy, decisions on how resources are to 
be allocated are usually taken by millions of households 
and thousands of fi rms – the exact number will, of 
course, depend on the size of economy. Th
e key point is 
that they interact as buyers and sellers in the market for 
goods and services. Prices and the operation of the price 
system underpin this interaction (see 
Chapter 2
); in turn, 
prices act to indicate the likely market value of particular 
resources. For example, a commodity in short supply but 
that has a high demand attached to it will have a high 
price. Alternatively, one that has a high supply and low 
demand will have a much lower price attached to it. Prices 
and the self-interest of people and businesses therefore act 
as a guide to the decisions that have to be taken.
Economics as a subject has its origin in the notion 
that prices and the