Economic Systems Flashcards
What is an economic system?
This term describes the ways society organizes its scarce resources to produce goods and services to satisfy the needs and wants of the population.
What are the basic economic questions?
- What to produce
- How to produce
- For whom to produce
What are some types of economic systems?
- Subsistence/Traditional
- Command/Planned (Socialist)
- Free market/Capitalist
- Mixed (Public and Private)
What is a subsistence economy?
An economic system reliant on the self provisioning of the community. The economy relies on hunting and cultivation for food, and surrounding trees for building shelter.
Characteristics of a subsistence economy?
- There is little specialization and little trade
- People live in family groups and grow most of their own food
Examples of subsistence economy?
EARLY TRIBES
- Tainos and Kalinagos
- Native American Groups
- African Tribal Groups
What is a command economy?
In a command economy, government makes all the economic decisions.
(What to produce, how to produce, how produce should be allocated to consumers, what price to sell at. )
Examples of a command economy
- The Soviet Union
- China
- Cuba
- North Korea
What are some benefits of a command economy?
- The state ensures that the needs of the whole community are met and not just the needs of those with the most wealth
- The state provides goods and services that private enterprise would be unwilling to provide
- There are no private monopolies
- There is likely to be less waste of resources
Disadvantages of a command economy
- Free enterprise and competition are discouraged
- Centralized production may not respond quickly enough to changing conditions and needs
- Creativeness and efficiency are not encouraged
- Planning may be manipulated by the more powerful groups that may not act in the best interest of all
- Too many non-productive government officials are needed to administer the system
What is a free market economy?
The consumer drives the economy – the consumer exercises the right to buy whatever he wants; he influences the producer’s decisions on what to produce;
Characteristics of a free market economy
- Private individuals own the resources
- There is little or no government interference (the activity of gov’t is usually restricted to the collection of taxes)
- How much is bought and sold is determined by market forces i.e. supply, demand, competition, customer satisfaction, price, quality of the product etc.
- NB. There are no purely free market economies. USA & Hong Kong economies come closest.
Benefits of a free market economy
- Free competition stimulates innovation and keeps prices down
- Consumers are free to spend their money in any way to give them maximum satisfaction
- A large variety of goods and services are available to consumers
- There is greater efficiency in the use of resources as market forces determine their allocation
- Producers are free to use their resources in any way they consider most suitable to them
Disadvantages of a free market economy
- The motive of the producer to make a profit drives the economy and thus encourages inequality in the distribution of wealth
- Monopolies develop and these can exploit consumers since they can decide on higher prices
- Advertising can be used to create an artificially high demand for products
- The powerful businesses may buy out the smaller ones, thus reducing competition
- Social goods for example health, education, defense, security etc., may not be adequately provided
What is a mixed economy?
Both government and private individual make economic decisions.
