Chapter 1: Introduction to Economic Systems - Flashcards

50 flashcards covering micro vs macro, economic systems (free market, mixed, centralized, Islamic), scarcity, opportunity cost, and production/distribution concepts from the lecture notes.

What does microeconomics study?

The behavior and decisions of individual economic units (households, firms, and government) and their demand and supply in specific markets.

What does macroeconomics study?

The aggregate behavior of the entire economy, including overall activity levels and national income.

Who are the main economic units studied in microeconomics?

Households, firms, and government.

What does macroeconomics analyze regarding employment?

Total employment in the economy (and unemployment levels).

In microeconomics, what is analyzed about labor?

Demand for and supply of labor in particular industries.

In microeconomics, what is analyzed about prices?

Demand for and supply of goods and the prices of individual items.

What is the Islamic economy's view on ownership?

Property is the absolute right of God; humans are trustees.

What is the role of government in the Islamic economy?

Ensure welfare of the community and protect against fraud and riba (interest).

Name the main world economic systems described.

Free Market Economy (Capitalism), Centrally Planned Economy (Socialism), Mixed Economy, Islamic Economy.

What is the price mechanism in a Free Market Economy?

Prices are determined by the interaction of demand and supply.

What motivates individuals in a Free Market Economy?

Maximum satisfaction; private sector is motivated by maximum profit.

Who owns resources in a Free Market Economy?

Individuals/private parties.

How are decisions about goods and services made in a Free Market Economy?

Individuals are free to decide what to buy and sell.

What characterizes a Centrally Planned Economy?

Government owns all resources and makes all economic decisions through planning.

What are the advantages of a Centrally Planned Economy?

Mass production and fair, even distribution of wealth.

What are the disadvantages of a Centrally Planned Economy?

Errors in decision-making; lack of motivation; limited technological innovation.

What are the advantages of a Free Market Economy?

Decisions are quick; incentives to work; high economic efficiency.

What are the disadvantages of a Free Market Economy?

Potential neglect of social welfare; resource wastage; price instability; risk of monopolies.

What are the advantages of a Mixed Economy?

More choices and efficient resource allocation; social welfare prioritized.

What are the disadvantages of a Mixed Economy?

Possible conflicts of opinions between private and public sectors.

What are the core ideas of the Islamic Economy about ownership and welfare?

God owns all; humans are trustees; government guarantees welfare and fair prices; no riba.

What is the role of price mechanism in the Islamic Economy?

Markets should function with government oversight to ensure fair prices and prevent fraud.

What is a public good?

A good that is non-excludable and non-rival, typically provided by the government.

What is a private good?

A good that is excludable and rival, typically provided by private markets.

What is the effect of price controls in an economy?

Government interventions that can create shortages or surpluses depending on direction.

What is the role of subsidies in economic policy?

Government financial support to influence prices or production.

What is taxation in economic policy?

Government revenue-raising to fund public goods and services; can affect supply and demand.

What is scarcity?

Goods and services are limited relative to unlimited wants; resources are finite.

What is opportunity cost?

The best alternative forgone when making a choice.

Give an example of opportunity cost (as described in the notes).

If a hospital is built, the forgone option could be a recreational park.

What are the three fundamental questions of the basic economic problem: What, How, and How Much?

What to produce, how to produce, and how much to produce.

What is the principle behind production factors to minimize cost?

Combine factors of production to minimize production cost.

What does capital-intensive production mean?

Production that uses more capital factors than labour.

What does labour-intensive production mean?

Production that uses more labour factors than capital.

How is distribution of goods determined?

By the distribution pattern of money income and purchasing power in the community.

What is the role of government in price determination in a Free Market?

Prices are largely determined by market forces; government intervention is limited.

What is the role of competition in a Free Market Economy?

Freely competing private parties drive efficiency and innovation.

What is the role of competition in a Centrally Planned Economy?

There is no competition; all activities are controlled by the government.

How does a Mixed Economy implement intervention?

Through taxation, subsidies, and price controls to balance private and public goals.

What is the private sector's aim in a Mixed Economy?

To maximize profit while allowing government regulation for public welfare.

What is the public sector's role in a Mixed Economy?

Provide public goods and regulate to achieve social welfare.

What is the difference between public and private goods?

Public goods are non-excludable and non-rival; private goods are excludable and rival.

What is the main aim of the economic systems described in the notes?

To allocate scarce resources to satisfy unlimited wants.

What is the primary function of the price mechanism?

To allocate resources efficiently through price signals.

What does 'economic efficiency' mean in a Free Market context?

Producing goods at lowest cost and allocating them to those who value them most.

What is the combined role of private and public sectors in a system?

Private sector pursues profit; public sector provides public goods and welfare.

What does 'rational decision making' involve?

Decisions aimed at maximizing welfare or profits given constraints.

Why is time considered a scarce resource?

Because time is finite and cannot be increased, affecting choices.

What happens when there is a shortage in the market?

Quantity demanded exceeds quantity supplied; prices tend to rise.

What happens when there is a surplus in the market?

Quantity supplied exceeds quantity demanded; prices tend to fall.