Basic Problems of an Economy and Role of Price Mechanism

Vocabulary flashcards covering the basic problems of an economy, capitalist economies, socialist economies, and mixed economic systems.

Central Economic Problem

The central issue faced by every economic system arising from the scarcity of productive resources relative to society's unlimited wants for them.

What to produce?

The basic economic problem where a society must decide which goods and services to produce and in what quantities each of them should be produced.

How to produce?

The basic economic problem of choosing between alternative techniques of production, specifically whether to use labour-intensive or capital-intensive techniques.

For whom to produce?

The basic economic decision regarding how the total output of goods and services (the national cake) should be distributed among members of society based on their buying capacity.

Economic System

The sum total of arrangements and devices for the production and distribution of goods and services that give effect to economic choice in a society.

Capitalist Economy

An economic system in which all means of production are owned and controlled by private individuals for profit, guided by private property and profit motive.

Right to Private Property

A characteristic of capitalism where productive factors such as land, factories, machinery, and mines are under private ownership and can be used or bequeathed by the owners.

Consumer Sovereignty

The principle in a capitalist economy that consumers are ultimately the king and determine which goods and services will be produced and in what quantities through their spending.

Price Mechanism

The impersonal forces of market demand and supply that operate automatically to solve the central economic problems in a capitalist system.

Socialist Economy

An economic system propounded by Karl Marx and Frederic Engels where the material means of production are owned by the whole community represented by the State; also known as a Command Economy or Centrally Planned Economy.

The Communist Manifesto

The work published in 1848 by Karl Marx and Frederic Engels in which the concept of a socialist economy was propounded.

Central Planning Authority

The agency in a socialist economy that sets and accomplishes socio-economic goals by making major economic decisions such as what, when, and how much to produce.

Administered Prices

Prices prevailing under socialism that are set by the central planning authority on the basis of socio-economic objectives rather than determined by market forces.

Mixed Economy

An economic system that depends on both markets and governments for allocation of resources, featuring the co-existence of private and public sectors.

Combined Sector

A sector in a mixed economy where both government and private enterprises have equal access and join hands to produce commodities and services in joint sectors.

Labour-intensive Technique

A production method involving the use of relatively more labour than machines, chosen when labour is relatively cheap.

Capital-intensive Technique

A production method involving the use of relatively more machines and capital than labour, chosen when capital is relatively cheaper or labour is costlier.

Relative Scarcity

The fundamental economic condition where resources are limited in relation to the wants of society.