17-Economic System

Question 1

Define Economic System

Answer 1

It is the means by which a Country answers the Basic Economic problems and Organizes its Resources in different ways to produce goods

Question 2

How Many Economic System are there?

Answer 2

–> Free Market Economy
–> Command or Centrally Planned Economy
–> Mixed Economy

Question 3

Define Free Market Economy

Answer 3

An Economic System where Resources are Allocated by price Mechanism with little to no Govt Intervention

Question 4

State The Advantages of Free Market Economy

Answer 4

–> Economic Efficiency and Lower Price
–> Quality of Goods
–> Consumer Sovereignty
–> Greater Choice
–> Financial Incentive

Question 5

Elaborate The Advantage of Free Market Economy
–> Economic Efficiency and Lower Price

Answer 5

Competition and Profit Motive Promotes Efficient Allocation of Resource. Competition means Firms try to keep Production Cost Down to Sell Goods at Competitive Price

Question 6

Elaborate The Advantage of Free Market Economy
–> Quality of Goods

Answer 6

Competition Means Firms try to Improve Quality of Good to Gain an Advantage over Rivals

Question 7

Elaborate The Advantage of Free Market Economy
–> Consumer Sovereignty

Answer 7

This implies that Spending Decisions by Consumers determines what is Produced

Question 8

Elaborate The Advantage of Free Market Economy
–> Greater Choice

Answer 8

Consumers can buy from Wide Selection of Goods, Workers have a Wide Choice of Employment Opportunity

Question 9

Elaborate The Advantage of Free Market Economy
–> Financial Incentive

Answer 9

Entrepreneurs have an Incentive to invest and take Risks to earn Profits, Labor has an Incentive to Work Hard to Gain more Earnings

Question 10

State The Disadvantages of Free Market Economy

Answer 10

–> Externalities
–> Inequality
–> Imperfect Information
–> Monopolies
–> Under Provision of Merit and Public Goods

Question 11

Elaborate The Disadvantage of Free Market Economy
–> Externalities

Answer 11

Free Market Firms will base their Decision on PRIVATE BENEFITS rather than considering SOCIAL COSTS and BENEFITS

Question 12

Elaborate The Disadvantage of Free Market Economy
–> Inequality

Answer 12

Those who Own Resources will become Richer than those who dont Own Resources. This can INCREASE INCOME INEQUALITY and the LACK OF WELFARE SUPPORT may lead to people LIVING IN ABSOLUTE POVERTY

Question 13

Elaborate The Disadvantage of Free Market Economy
–> Imperfect Information

Answer 13

Consumers wont be able to make RATIONAL CHOICES if they have ASYMMETRIC INFORMATION. People may Consume Excessive amount of DEMERIT GOOD such as Tobacco and Alcohol being Unaware of their Dangers. There is a LACK OF REGULATIONS AND TAXATION to Protect Consumer

Question 14

Elaborate The Disadvantage of Free Market Economy
–> Monopolies

Answer 14

There is a Danger that a firm may become the Sole Supplier of a good and EXPLOIT Consumers by Charging Higher Prices than Free Market Equilibrium

Question 15

Elaborate The Disadvantage of Free Market Economy
–> Under Provision of Merit and Public Goods

Answer 15

Merit Goods are Underprovided by the Market Mechanism due to Free Rider Problem, Public goods include Defense and Street Light, Merit goods include HealthCare and Education

Question 16

Define Command or Centrally Planned Economy

Answer 16

An Economic System where ALL RESOURCES are Allocated by GOVT with no Market Mechanism
Eg- Soviet Union, North Korea

Question 17

Define Mixed Economy

Answer 17

An Economic System where Resources are PARTLY allocated by PRICE MECHANISM and PARTLY by GOVT
Eg- Most Economies Today
The Role of State / Govt Intervenes to Correct Market Failure
In Most Mixed Economies, The State has number of Key Roles
- Defense
- Public Goods
- Merit Goods
- Essential Public Goods