Economic systems

Question 1

Economic systems

Answer 1

the way which an economy tries to solve the basic economic problem of scarcity. The means by which choices are made in an economy

Question 2

Market economy

Answer 2

an economy where the basic economic problem is solved by market mechanism / price mechanism

Question 3

Centrally planned economy

Answer 3

an economy where the basic economic problem is solved by the government

Question 4

Mixed economy

Answer 4

an economy where the basic economic problem is solved by both the market forces and the government

Question 5

Transition economy

Answer 5

an economy that is moving from centrally planned economy to market economy

Question 6

3 advantages and disadvantages of market economy

Answer 6

ADVANTAGES

1. consumer sovereignty
2. competition encourages innovation, R&D
3. price mechanism is used to allocate resources

DISADVANTAGES

1. public goods are not produced
2. monopoly abuse of power, inequality & poverty
3. merit goods underproduced, demerit goods overproduced

Question 7

3 advantages and disadvantages of centrally planned economy

Answer 7

ADVANTAGES

1. lower prices
2. full employment
3. low levels of inequality

DISADVANTAGES

1. government lacks full information
2. shortages & surplus are common
3. lack of competition, slower growth rate

Question 8

3 advantages and disadvantages of mixed economy

Answer 8

ADVANTAGES

1. use of price mechanism
2. macroeconomic stability through the use of fiscal, monetary and supply side policy
3. competition, innovation, R&D

DISADVANTAGES

1. difficult to know how much govt. should intervene
2. govt. failure can occur
3. uncompetitive government monopoly occur

Question 9

What are the requirements for transition in transition economy?

Answer 9

1. Privatisation
2. remove government price controls
3. use of market mechanism (supply and demand)

Question 10

What are the problems when transitioning?

Answer 10

1. GDP may fall at first
2. price rises
3. infrastructure might not be good enough