Economics: Key Economic Questions and Systems

These flashcards cover key concepts regarding economic systems and the fundamental economic questions that guide production and distribution in various economies.

What are the three basic economic questions?

1) What and how much to produce? 2) How to produce? 3) For whom to produce?

What is an economic system?

A collection of institutions involved in directing and organising the production and distribution of goods, services, and incomes in an economy.

What are the four main types of economic systems?

1) Traditional economies 2) Market economies 3) Planned economies 4) Mixed economies

What defines a traditional economy?

An economic system found in remote areas where families and tribes make decisions based on long-established customs.

How does a traditional economy decide 'What and how much to produce?'

Goods and services are dictated by what's always been produced, focusing on essentials for survival.

What is the allocation method used in traditional economies for surplus goods?

Surplus items are typically exchanged through a barter system rather than money.

How does a market economy answer the 'What and how much to produce?' question?

Consumer sovereignty determines production based on what people choose to buy, reflected in price changes.

What is a key characteristic of a pure market economy?

The three basic economic questions are answered by market operations without government interference.

How does a planned economy answer the 'What and how much to produce?' question?

The central government sets production targets based on planning agency assessments of needs.

What is the outcome of a planned economy in terms of consumer choice?

Consumers have no freedom or choice as the government assumes it knows best what is needed.

What does a mixed economy combine?

Features of market economies and planned economies, incorporating free markets and some government intervention.

Why is government intervention present in mixed economies?

To reduce market failure and improve living standards when the free market cannot allocate resources efficiently.

How do mixed economies determine 'For whom to produce?'

Income distribution largely reflects the market value of resources, leading to economic and social inequality.

What is meant by 'relative scarcity'?

The condition that resources are limited compared to the wants and needs of individuals in an economy.

What is market failure?

When resources are not allocated in ways that maximize consumer satisfaction or society's general wellbeing.