Chapter 2 - Economic Systems Flashcards
Name the 3 economic systems
Traditional system
Command system
Market system
What are the 3 central questions that have to be solved in every society?
1) what goods & services to produce
2) how to produce
3) for whom to approach
Describe the Traditional economic system.
Oldest of economic systems
Tasks & methods of production prescribed by custom
Slow to adapt to changing conditions
Not as common anymore
Describe the Command economic system.
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
Which 2 basic criteria determines / classify an economic system?
Property rights Coordinating mechanisms (what, where, how to produce)
Describe the Market economic system.
System in which individual decisions and preferences are communicated & produced.
What is market prices?
Signals of scarcity which indicate to customers what they have to sacrifice to obtain the goods or service.
What is a market?
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.
For a market to exist the following 5 conditions have to be met:
- 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
Who is regarded as the father of the Capitalist Market System?
Adam Smith, a Scottish professor
Who wrote “Wealth of the nations”
Adam Smith
Smith compared the market mechanism to …
an invisible hand
What feature is important in market capitalism?
Competition
Who won the Nobel prize for economics in 1970?
The American, Paul Sameulson
Which economic system does South Africa have?
Mixed economy
In South Africa, in which area of the economy does government intervene?
Price control, this is however uncharacteristic of a market system eg. Fuel
Which 3 interrelated things did Smith emphasise as important?
- division of labour
- free trade
- limited role for government
What document did Karl Marx publish in 1848 with the help of his friend Friedrich Engels?
The Communist Manifesto
What profession did Marx practice from time to time?
Journalism
What arguments did Marx have against capitalism?
It was self-destructive. Labour is the source of all value. In a capitalist system, workers’ contribution exceeds the amount they receive in wages.
For which economic system did John Maynard Keynes lay the foundation?
The mixed economy
What did Keynes & Smith believe in common?
That private markets should be allowed to function freely without government intervention.
Did Keynes invent macroeconomics?
No, but focussing on aggregates he laid the foundation for modern macroeconomics, also called Keynesian economics.
