Chapter 2: Economic Systems Flashcards
What are the three central questions
Output questions
- what** goods and services will be produced and in what quantities
Input questions
- how** will each good and service be produced, how much of this cost resources will be used
Distribution questions
- for whom** will the goods and services to be produced, who will receive them how much of it will they receive and where will the production occur
Name the economic systems
Traditional
Command
Mixed
Market
Characteristics of a traditional system
Oldest solution to the 3 economic questions
The same goods are produced and distributed in the same way by each generation
Rigid social customs
Based on culture, rituals and tradition
Family and gender orientated
Disadvantages of the traditional system
Rigid, slow to adapt to change
Resists innovation
No economic progress
Economic activity is not their first priority
Advantages of the traditional system
Important aspects of economic behaviour are still governed by tradition
Children still follow their parents ways, they’re not bound
Provides clear and easy answers the the 3 economic questions
Characteristics of a command system
Relies on the government to make all economic decisions
It is also called centrally planned or socialist or communist systems
-in a pure socialist system all factors of production except labour are owned by the state
-in pure communist system all factors of production are owned by everyone (everything is common* property)
Command economies are not only governed by central planning but by state ownership of all goods and services
Hence, command economies are more socialist than communist
Characteristics of the market system
The market system is based on private ownership and allows prices and markets to direct the economy
Individual decisions and preferences are communicated and coordinated through the market
Market prices are crucial as they are used as an indication of scarcity
It is also known as a capitalist system and it’s driven by profit
Economic activities and decisions are based on self interest
The invisible hand ensures that everyone in society is better off
Define a market
The market is any contract or communication between potential buyers and potential sellers of a good or service
It does not require a specific location some markets are abstract and can take place anywhere through any means
How can the market system succeed in solving the three economic questions
What
Goods and services that consumers are willing to spend their income on and* that can be sold profitably
How
Suppliers are forced to combine resources in the most efficient ways.
Such decisions will be governed by prices of factors of production
For whom
Those who have the means to purchase them
Characteristics of a mixed system
Most societies today have mixed economies
Uses limited government intervention well also playing free market concepts (command + market system)
However one of the mechanisms would usually dominate than the other
Under the mixed system what is the difference between Privatisation and Nationalisation
Privatisation is the selling of assets to the private sector (that is if Eskom was sold to the private sector)
Nationalisation is when privately owned assets are bought by the state
What does the economist Adam Smith believe in
Decentralised decision making
- Individuals have to pursue their own self interest
- Invisible hand
What does the economist Karl Marx believe in
- Labour is important/ source of value
- Against Capitalism, exploitation
What does the economist John Keynes believe in
Minimum government intervention In order to stimulate economic activity and reduce unemployment
