Economic System

What is an economic system?

An economic system is a social and institutional mechanism developed to solve the basic economic problems of an economy.

Why do all economies face common economic problems?

Because all economies face the fundamental problem of scarcity of resources.

What are the 3 basic economic problems?

1. What to produce and in what quantity — resource allocation 2. How to produce — production 3. For whom to produce — distribution/rationing.

What is the problem of resource allocation?

It is the problem of deciding what goods and services to produce and in what quantity because resources are limited.

What is the problem of production?

It is the problem of deciding how to produce goods and services using the available resources.

What is the problem of distribution/rationing?

It is the problem of deciding for whom goods and services are produced or how output is distributed among people.

What is the fundamental function of an economic system?

To solve the basic economic problems.

What are the 3 functions of an economic system?

Allocation function, Production function, Distribution/Rationing function.

What is the allocation function?

The allocation function involves decisions about what to produce and in what quantity to solve the problem of resource allocation.

Why is the allocation function necessary?

Because an economy has limited resources and must decide how to allocate them among competing wants.

What is the production function?

The production function involves deciding how to produce, considering the available labour, capital, technology and factor costs.

What does the production function mainly determine?

Whether production should be labour-intensive or capital-intensive, depending on factor availability and factor prices.

What is the distribution/rationing function?

It involves deciding for whom to produce and how income/output is distributed among economic members.

What does the distribution function depend on in a market economy?

It depends mainly on purchasing power, which is connected to income distribution.

What are the main macroeconomic objectives used to measure economic performance?

Full employment, economic efficiency, economic growth, price stability, equality in income distribution, external stability, quality of environment, economic freedom.

What is full employment?

A situation where everyone who is willing and able to work can obtain a job.

What is economic efficiency?

The extent to which an economy avoids waste and uses resources efficiently.

What is economic growth?

An increase in the production/output capacity of an economy over time.

What is price stability?

Maintaining a stable general price level and avoiding major inflation or deflation.

What is equality in income distribution?

The objective of achieving a fairer distribution of income among members of the economy.

What is external stability?

The objective of maintaining stability in the economy's external economic relationships, particularly with other countries.

Why is quality of environment an economic objective?

Because economic activity should be carried out while maintaining the quality of the environment.

What is economic freedom?

The freedom of economic decision makers to make economic choices.

What are the 3 essential features found in economic systems?

1. Mechanism for coordinating decisions and distributing scarce resources 2. Resource/property ownership and property rights 3. Incentive mechanism.

What are the 3 mechanisms for coordinating decisions about scarce resources?

Price mechanism, central planning mechanism, tradition and customs.

Which economic system uses the price mechanism?

Market economy.

Which economic system uses central planning?

Command/planned economy.

Which economic system uses tradition and customs?

Traditional economy.

What are the 3 main economic systems?

Market economy, Command/Planned economy, Traditional economy.

What are the 3 main types of property?

Real property, Financial property, Intellectual property.

What is real property?

Property such as buildings, vehicles and machinery.

What is financial property?

Financial assets such as company shares, fixed deposits and Treasury bills.

What is intellectual property?

Property based on intellectual creations, such as copyrights, patents and trademarks.

What are the 3 main aspects of property ownership?

Control right, Cash flow right, Disposal right.

What is control right?

The right to use/control a particular property according to one's own choice.

What is cash flow right?

The right to earn income from a particular property.

What is disposal right?

The right to sell or exchange a particular property.

What is a traditional economic system?

A traditional economic system is an economy where basic economic problems are solved through traditions, customs and beliefs.

What is the main characteristic of a traditional economic system?

Economic decisions are based mainly on traditions and customs rather than changing market conditions.

What happens to production in a traditional economy?

Production tends to continue according to traditional patterns; what and how much to produce may be based on what was produced previously.

How are occupations commonly passed on in a traditional economy?

Jobs are mainly passed from one generation to another, such as from father to son.

What are the key features of a traditional economic system?

Production based on traditions and customs; simple self-sufficient system; simple technology; common property rights; output distributed according to customs and traditions.

Why are traditional economies considered inflexible?

They are reluctant to change traditions and customs, so economic conditions tend to remain unchanged.

What are the 3 main economic systems from a theoretical and practical viewpoint?

Market economy, Planned/Command economy, Traditional economy.

What is a free market economic system?

A free market economy is an economy that solves basic economic problems through the price mechanism/market mechanism, with property and resources largely owned by the private sector.

What are the key features of a free market economic system?

Private property ownership; free enterprise and freedom of choice; consumer sovereignty; competitive markets; price mechanism; individual material incentives; minimum government involvement.

What is private property ownership in a market economy?

Ownership of property and resources is largely held by the private sector.

What does free enterprise and freedom of choice mean?

Economic decision makers have the freedom to make their own economic choices.

What is consumer sovereignty?

Consumer sovereignty is the situation where what is produced and in what quantity is determined by consumers' choices and desires.

How does consumer sovereignty influence production?

Consumers' purchasing decisions signal producers what to produce and in what quantity.