CH2: Economic Systems Flashcards
(10 cards)
What, and how do microeconomics and macroeconomics relate to each other?
Microeconomics studies individual units (households, firms, markets).
Macroeconomics examines the economy as a whole (inflation, unemployment, GDP).
Micro decisions (like pricing or hiring) merge into macro outcomes (like national income or employment). Macro trends also influence micro behavior (e.g. interest rates affect consumer spending).
What are the central economic questions and why are they important?
- What to produce?
- How to produce it?
- For whom to produce?
These questions are important because they determine how a society allocates its limited resources to meet the needs and wants of its people. They guide economic decision-making in all systems—traditional, market, command, or mixed.
Market systems use prices and supply/demand, command economies rely on government planning, traditional systems use customs.
What are the main types of economic systems?
Economic systems include traditional (custom-based), command (government-directed), and market (price-driven). Most real-world economies are mixed, combining elements of all three.
What is a command economy and how does it function? Pros & cons
An economic system where the government controls all major economic decisions.
How it Works:
The state plans production, sets prices, and allocates resources—no market forces.
Pros:
Rapid industrialization (not profitably focused)
Low unemployment
Income equality (in theory)
National goals prioritized
Cons:
Inefficiency and waste
Lack of innovation
Poor product quality
Ignores consumer needs
What is a market economy and how does it function? Pros & cons
An economy where prices and production are driven by supply, demand, and competition, with little government control.
How It Works:
Buyers and sellers freely interact; prices guide decisions.
Pros:
Efficient
Innovative
Consumer choice
Cons:
Inequality
Market failures
Ignores social costs
What is a mixed economy and what are its characteristics? Pros & cons.
An economic system combining elements of both capitalism (private ownership) and socialism (government intervention).
Characteristics:
Coexistence of public & private sectors
Government regulates markets
Social welfare programs
Consumer choice & market competition
Pros: Balances efficiency with equity, protects against market failure, promotes innovation while ensuring basic needs.
Cons: Risk of overregulation, inefficient public sector, potential for corruption or conflicting policy goals.
What is a traditional economy and how does it work? Pros & cons
An economy based on customs, traditions, and barter, often in rural or tribal communities.
How it Works:
Production and trade follow ancestral methods; roles are inherited; minimal use of money or tech.
Pros:
Stable and sustainable
Strong community ties
Low waste
Cons:
Resists change
Low productivity
Vulnerable to external shocks
how does a market system allocate resources and distribute income?
Markets allocate resources via price signals. Income is distributed based on ownership of production factors. Competition influences pricing, but in reality competition is often imperfect due to monopolies or barriers.
what are economic flows, and how do they differ from stock variables?
Flows are measured over time (e.g., income, spending, production), while stocks are measured at a point in time (e.g., wealth, inventory, capital). The economy involves flows of goods, services, and money between households and firms.
who were the three key thinkers in economic systems, and what were their contributions?
- Adam Smith – Advocated for capitalism and the “invisible hand” guiding free markets.
- Karl Marx – Critisized capitalism; promoted socialism and class struggle theory.
- John Maynard Keynes – Argued for government intervention to stabilize economies during downturns.
