1.5 Decision-making in different economic systems

Question 1

the three economic questions

Answer 1

Three basic economic questions for an economy arise because of the problem of relative scarcity. They include the what and how much to produce question (the type and quantity of each good or service), the how to produce question (production methods) and the for whom to produce question (how goods, services and incomes are distributed amongst the population).

Question 2

pure market economy

Answer 2

A pure market economy is an economic system where the 3 economic questions are dictated by the price system, with zero government interference.

Question 3

traditional economies

Answer 3

Traditional economy is one that today only exists in remote pockets of other economies. The three basic economic decisions are answered according to long-held customs and beliefs.

Question 4

three sector model

Answer 4

Three-sector circular flow model is a simple diagram that shows the three key economic agents or parts making up a mixed economy (the household or consumer sector, the producer or business sector, and the government or public sector). It also shows the ways these sectors interact with each other through the four main flows (i.e. flow 1 — resources, flow 2 — incomes, flow 3 — spending and flow 4 — production).

Question 5

purely planned

Answer 5

Purely planned economy is one where all economic decisions about the production and distribution of output are made by reference to government decisions, without any reliance on the market.

Question 6

mixed economies

Answer 6

Mixed economies are a type of economic system where most decisions are made by the operation of free markets and the price system, but also where there is a limited degree of government