Economic Systems Flashcards
What is an economic system?
An economic system is the ay in which an economy is organised and run, including how to best allocate society’s scarce resources.
Name the 3 main economic systems and Explain them:
The Planned Economy or Command Economy.
The government allocated all resources
The Markey Economy
The economic system relies on the market forces of demand and supply to allocate resources.
The Mixed Economy
The Mixed Economy is a comb of the planned and the market economy.
List the characteristics of a Planned Economy.
• The government or other central authority makes decisions and determines how resources will be used
• Change can occur relatively easily
• There is little individual freedom
• There is no competition
• Businesses are not run to create a profit
• Consumers have few chooses in the market place
• Factories are concerned with quotas
• Shortages are common because of poorly run factories and farms
• The government dictates the job in which you work
• The government sets the prices of goods and services
• Examples of Command economies: Cuba, North Korea and the People’s Republic of China
List the advantages of communism:
Low Unemployment
Great Job Security
Equal Incomes
Free Health Care
List the disadvantages of communism
No incentive to work
No incentives to innovate or come up with good ideas
No Competition
Corrupt Leaders
Few Individual Freedoms
List the Characteristics of the Free Market System:
No government interference in economic activities - resources are owned by the private sector.
- Resources are allocated on the basis of price - a higher price encourages more supply.
- Financial incentives allocate scarce resources - e.g., agricultural land is used for harvesting crops with the greate financial return.
- Competition creates choice and opportunities for firms and private individuals - variety increases.
List the disadvantages of the market system:
- Environmental issues - there are negative consequences of economic prosperity under the market system such as resource depletion, pollution and climate change.
- Income and wealth inequalities - In a market system, the rich have far more choice and economic freedom.
- Social hardship - Public goods such as streetlights may not be provided. Relief in poverty in society might only be done through voluntary charities.
- Wasteful competition - competitive pressures can mean that firms use up unnecessary resources to gain competitive advantage over their rivals, such as excessive packaging and advertising clutter.
List the advantages of the market system
Efficiency - Competition helps to ensure that firms pay attention to what customers want.
- Freedom of choice - individuals can choose which goods and services to purchase and which career to pursue.
- Incentives - the profit motive for firms and the possibility for individuals to earn unlimited wealth create incentives to work hard.
