2.1 – Economic Systems Flashcards
What is an Economy?
An area where people and firms produce, trade and consume goods and services.
What is Resource Allocation?
The way in which economies decide what goods and services to provide, how to produce them and for who to produce them for.
What are the 3 economic systems?
The Market Economic System
Planned Economic System
Mixed Economic System
What is the Market Economic System?
Market in which all decisions are made by private individuals; that is, there is no government intervention or involvement in resource allocation.
What are the features of market economic system?
All resources are owned and allocated by private individuals
Profit is the main-motive
The demand and supply fixes the price of products.
What to produce is solved by producing the most-demanded goods
How to produce is solved by using the cheapest yet efficient combination of resources
For whom to produce is solved by producing to people who are willing and able to pay for goods
Advantages of market economic system
+ A wide variety of quality goods and services will be produced
+ Firms will respond quickly to consumer changes in demand
+ High efficiency will exist.
+ No taxes on goods and services and income
Disadvantages of market economic system
- Only profitable goods and services are produced
- Firms will only produce for consumers who can pay for them.
- Only profitable resources will be employed.
- Harmful (demerit) goods may be produced
- Negative impacts on society may be ignored by producers
- Monopoly’s will restrict supply
- Duplication of products may take place
What is the Planned Economic System?
Here, all decisions are made by the government. They decide what to produce, how to produce and for whom to produce.
Features of Planned Economic System
All resources are owned and allocated by the govt.
Profit is not the main motive- social welfare is
They produce goods that will be most beneficial to the social welfare
They could use inefficient production methods
Goods will be produced for all people- mainly those with poor incomes.
Advantages and Disadvantages of Planned Economic System
+ produce necessities, public goods and merit goods.
+ Negative externalities will be controlled and reduced.
+ Prices are kept low
+ Low unemployment
+ Duplication of products is eliminated.
- Consumer sovereignty is low
- Lack of profit may lead to firms being inefficient
What is the Mixed Economic System?
Here, both the market and planned economy co-exist
Features of Mixed Economic System
Both the public and the private sector exists.
Planning and final decisions are made by the govt. while the market system can determine allocation of resources along with the public organizations.
Advantages of Mixed Economic System
+ The govt. can provide public goods, necessities and merit goods. The private businesses can provide most-demanded goods
+ The govt. will keep externalities, monopolies, harmful goods etc. in control.
+ The govt. can provide jobs in the public sector
+ The govt. can also provide financial help
Disadvantages of Mixed Economic System
- Govt. taxes will be imposed
- Govt. laws and regulations can increase production costs
- Public sector organizations will still be inefficient and will produce low quality goods and services.
Explain the sectors of economy
Primary - Raw Materials
Secondary - Production
Tertiary - Services
