CH2: Economic Systems Flashcards
How do micro and macroeconomics relate to each other?
Micro-level decisions (e.g., consumer spending) aggregate to influence macroeconomic outcomes (e.g., national consumption). Conversely, macro factors like inflation or interest rates influence individual and firm behavior. The two are interdependent—micro builds up to macro.
Question
Answer
What are the three central economic questions every system must answer?
- What to produce?” 2. How to produce? 3. For whom to produce? “These address scarcity by determining allocation of limited resources.
What is an economic system?
It’s the structure by which a society decides how to allocate scarce resources, involving coordination between households, firms, government, and financial institutions.
What are the three main types of economic systems?
- Traditional system
(Some economies are mixed
blending elements of all three.)
What characterizes a traditional economic system?
Production and roles are based on customs and inheritance. It is rigid, resistant to change, and prioritizes cultural continuity over economic efficiency.
What are the advantages and disadvantages of the traditional system?
✔️ Clear roles, cultural stability
✖️ Resists innovation
poor adaptability, low efficiency
What is a command economic system?
A central authority (typically the government) controls all production, distribution, and resource allocation decisions. It plans the economy in advance.
List advantages and disadvantages of a command economy.
✔️ Coordinated planning, reduced inequality, focus on social welfare
✖️ Inefficiency
lack of innovation, shortages or surpluses due to poor pricing signals
Give examples of countries with command economies.
Strong command: North Korea
Moderate command: China (transitioning)
Vietnam (partial reforms)
What defines a market system?
Decentralized decisions by buyers and sellers determine production and prices via supply and demand. Private ownership and profit motive dominate.
What are the key conditions for a market to exist?
- At least one buyer and seller” “- Legal/traditional contract enforcement
What role do prices play in a market system?
Prices act as signals of scarcity, guiding consumers and producers. They coordinate decentralized decisions.
What are the advantages and disadvantages of market systems?
✔️ Efficiency, innovation, consumer choice
✖️ Inequality
under-provision of public goods, market failures (e.g., pollution)
What is meant by ‘market capitalism’?
A system where most resources are privately owned and coordinated through voluntary market exchanges for profit, with minimal state intervention.
How does a market system answer the question: ‘What to produce?’
Goods and services are produced based on consumer demand and profitability.
How does a market system answer: ‘How to produce?’
Firms choose the most cost-effective method of production, depending on factor prices and technology.
How does a market system answer: ‘For whom to produce?’
Goods go to those with income or purchasing power, reflecting each person’s resource contribution.
What is the role of income distribution in a market system?
Income earned from contributing to production determines access to goods, creating inequality unless addressed by policy.
