CH2: Economic Systems Flashcards
How do microeconomics and macroeconomics relate to each other?
Microeconomics studies individual decisions (households, firms), while macroeconomics looks at the economy as a whole. They are interdependent—macro outcomes emerge from micro-level actions, and macro conditions affect micro behavior.
What are the central economic questions and why are they important?
The three central questions are: What to produce? How to produce? For whom to produce? Market systems use prices and supply/demand, command economies rely on government planning, traditional systems use customs.
What are the main types of economic systems?
Economic systems include traditional (custom-based), command (government-directed), and market (price-driven). Most real-world economies are mixed, combining elements of all three.
What is a command economy and how does it function?
In a command economy, the government decides production and allocation. Pros: rapid industrialization, social goals. Cons: inefficiency, lack of incentives. Examples include North Korea (strict) and China (moderate, transitioning).
What is a market economy and how does it function?
In a market economy, prices guide resource allocation through supply and demand. It relies on private ownership and minimal government interference. Pros: innovation, efficiency. Cons: inequality, market failures. ‘Market capitalism’ refers to this system.
What is a mixed economy and what are its characteristics?
A mixed economy combines elements of market and command systems. South Africa is a mixed economy where private enterprise coexists with significant government involvement in social welfare and regulation.
What is a traditional economy and how does it work?
A traditional economy is based on customs and past practices. Pros: stability and sustainability. Cons: resistance to innovation, low growth, limited choices.
how does a market system allocate resources and distribute income?
Markets allocate resources via price signals. Income is distributed based on ownership of production factors. Competition influences pricing, but in reality competition is often imperfect due to monopolies or barriers.
what are economic flows, and how do they differ from stock variables?
Flows are measured over time (e.g., income, spending), while stocks are measured at a point in time (e.g., wealth, inventory). The economy involves flows of goods, services, and money between households and firms.
who were the three key thinkers in economic systems, and what were their contributions?
Adam Smith promoted free markets and the ‘invisible hand’. Karl Marx criticized capitalism and advocated for collective ownership. John Maynard Keynes emphasized government intervention during economic downturns.
