Mod 3 - Economic Systems

Question 1

Explain the free market economy.

Answer 1

This is an economy where the 3 economic questions are answered by households and firms. These parties interact on the market for goods and services as buyers and sellers. The interaction determines the prices of goods and services and by extension, the market value of the resources. For example when there is a shortage of a product on the market, there would be a increase in its prices to meet the high demand and vice versa.

Question 2

What are features of free market economy?

Answer 2

1. Property is owned by individuals and or groups of individuals in the economy. Private property is sometimes subjected to legal frameworks such as laws and courts
2. Consumers determine what to produce in the economy as businesses will only produces goods that are being demanded by them. Producing anything that is outside of what is being demanded can lead to the business failing, therefore produced what is demanded results the firms gaining higher profits.

3.Competition dampers the ability of buyers and sellers to determine the price of goods and services. But it leads to producers being more efficient producing their products in an attempt to maximize profits

Question 3

What are advantages of a free market economy?

Answer 3

1. There is a wider variety of goods and services in the economy
2. Producers are able to produce whatever is being demanded by consumers are able to purchase whatever they desire
3. Producers have more control in terms of making decisions and therefore there is greater participation
4. There is little government intervention in the market.

Question 4

What are the disadvantages of a free market economy?

Answer 4

1. When businesses fail there is a wastage of money
2. Consumers are in danger of being exploited through higher prices when there is especially no legal framework against this.
3. Larger firms can buy smaller ones , eliminating competition
4. When there is not sufficient demand for a particular good there would be the stop in production of it.

Question 5

Explain the planned or command economy.

Answer 5

It is a type of economic system in which the government has full control of resources as well as making decisions on what, how and for whom to produce. The government sets up a central planning boards who is responsible for the composition and the organization of production and distribution of output. They determine what to produce, how much quantities to produce, what type of production process to use and for whom to produce it for. This type of economic system ignores the working of the market mechanism to determine the prices of goods and services.

Question 6

What are the advantages of a planned economic system ?

Answer 6

1. There is a more equal and equitable distribution of income
2. Consumers are protected against exploitation in the form of higher prices
3. State own business reduce the occurrence of wastage of resources
4. Monopolies are not allowed to form.

Question 7

What are the disadvantages of a planned economy?

Answer 7

1. The state business may not produce what people want
2. The free enterprise and competition spirit would be not encouraged
3. These businesses may not respond to changes quickly
4. Initiative would be stifled due to lack of individual incentive.

Question 8

Explain a mixed economy system.

Answer 8

It is where both private enterprises and the state would make decisions on the allocation of resources. Both private and public have ownership of productive resources. Therefore, decisions on what, how and for whom to produce involves both parties.

Question 9

What are the features of a mixed economic system

Answer 9

1. Some goods such as computers and cars are not only produced by the private sector.
2. The government can step in by putting laws in place to protect consumers against unfair trading practices
3. The state provided essential goods and services such as education and health care
4. The government collects tax revenue in order to finance state owned and operated services.

Question 10

What are the impacts of a free market economy on the decision making of firms

Answer 10

1. The market mechanism demand and supply automatically allocates resources. Therefore , if there is an increase in demand, more resources will need to utilized in order to for more to be earned.
2. Some businesses may engage in environmental degradation as there is limited amount of government intervention
3. In this type of economic system it leads to an encouragement of entrepreneurial spirit as anyone can start up a business.

Question 11

What are the impacts of a planned economy economy on the decision making of firms

Answer 11

1. There is a dampen of entrepreneur spirits as the government owns and utilizes most of the resources in the economy.
2. Most of the businesses are government owned and their production target is what is needed and not the profit to be earned
3. The central planning board guides businesses on producing standardized products with little to no variation.

Question 12

What are the impacts of a mixed economy on the decision making of firms

Answer 12

1. This economic system is mixed with both planned and free market economy so that impact on business decisions will be a mixture of their features.