Chapter 2 - Economic Systems

Question 1

Name the 3 economic systems

Answer 1

Traditional system
Command system
Market system

Question 2

What are the 3 central questions that have to be solved in every society?

Answer 2

1) what goods & services to produce
2) how to produce
3) for whom to approach

Question 3

Describe the Traditional economic system.

Answer 3

Oldest of economic systems
Tasks & methods of production prescribed by custom
Slow to adapt to changing conditions
Not as common anymore

Question 4

Describe the Command economic system.

Answer 4

Here participants are instructed (commanded) what to produce & how to produce it by a central authority. Eg. China, Poland, Russia.
Also called “Centrally Planned System” / Socialist or Communist System

Question 5

Which 2 basic criteria determines / classify an economic system?

Answer 5

Property rights
Coordinating mechanisms (what, where, how to produce)

Question 6

Describe the Market economic system.

Answer 6

System in which individual decisions and preferences are communicated & produced.

Question 7

What is market prices?

Answer 7

Signals of scarcity which indicate to customers what they have to sacrifice to obtain the goods or service.

Question 8

What is a market?

Answer 8

A market is any contact or communication between potential buyers & potential sellers of goods or services.
This contact can be personal or take place via phone ect.

Question 9

For a market to exist the following 5 conditions have to be met:

Answer 9

• at least 1 potential buyer & seller
• have something to sell
• buyer must have means to buy it
• exchange ratio (market price) must be determined
• agreement must be guaranteed by law / tradition

Question 10

Who is regarded as the father of the Capitalist Market System?

Answer 10

Adam Smith, a Scottish professor

Question 11

Who wrote “Wealth of the nations”

Answer 11

Adam Smith

Question 12

Smith compared the market mechanism to …

Answer 12

an invisible hand

Question 13

What feature is important in market capitalism?

Answer 13

Competition

Question 14

Who won the Nobel prize for economics in 1970?

Answer 14

The American, Paul Sameulson

Question 15

Which economic system does South Africa have?

Answer 15

Mixed economy

Question 16

In South Africa, in which area of the economy does government intervene?

Answer 16

Price control, this is however uncharacteristic of a market system eg. Fuel

Question 17

Which 3 interrelated things did Smith emphasise as important?

Answer 17

• division of labour
• free trade
• limited role for government

Question 18

What document did Karl Marx publish in 1848 with the help of his friend Friedrich Engels?

Answer 18

The Communist Manifesto

Question 19

What profession did Marx practice from time to time?

Answer 19

Journalism

Question 20

What arguments did Marx have against capitalism?

Answer 20

It was self-destructive. Labour is the source of all value. In a capitalist system, workers’ contribution exceeds the amount they receive in wages.

Question 21

For which economic system did John Maynard Keynes lay the foundation?

Answer 21

The mixed economy

Question 22

What did Keynes & Smith believe in common?

Answer 22

That private markets should be allowed to function freely without government intervention.

Question 23

Did Keynes invent macroeconomics?

Answer 23

No, but focussing on aggregates he laid the foundation for modern macroeconomics, also called Keynesian economics.