Production Question
Historically, economic systems have been established to answer the three fundamental questions of production:
What to Produce?
How to Produce?
For Whom to Produce?
Economic System
“The set of laws, institutions, and common practices that help a nation determine how to use its scarce resources to satisfy as many of its people’s needs and wants as possible”
The Command Economy
All production decisions are made by a small group of political leaders who hold the power = centrally planned>communistic
centrally planned
communistic
command
Answered by the central authority based on what is in the best interest of the state.
State authorities draw up plans to meet individual needs such as food, housing, medicine, and education.
Determines the products and quantities to be produced, who will work where, what machinery will be available, what machinery will be available to assist production, and how much each worker will be paid.
Productive resources owned by the state and efficiently allocated by the central authority on behalf of the state.
The individual has the obligation to serve the state.
Rewarded for their contribution by giving them share of goods and services, and sometimes special privileges.
Rely on the system of reward and punishment to promote productivity.
Needs already covered, so worker’s spend their modest wages on consumer goods – of food, clothing, and shelter.
State plan emphasizes production of capital goods.
Why is this?
Capital goods increase the economy’s ability to produce more in the future.
The Market Economy
Activity is coordinated by many individuals who make independent decisions in a free marketplace.
Also known as Free-Enterprise
Or Private Enterprise>capitalistic>market economic system
Actions of individual buyers and sellers in the marketplace answer:
What to produce - Determined by consumer demand.
Businesses only produce or carry those goods in demand.
Fetch the highest prices and higher profits.
how to produce ?
How?
Profit determines how goods and services will be produced.
Producers maximize their profits by using the least costly and most efficient methods of production.
Inefficiency will not compete or survive.
For whom?
Distribution determined by the income people receive for their contributions to the production process.
If they can afford to pay for it, people with high incomes are entitled to more of the national output than those with low incomes.
Basic Elements:
Private property
Freedom of enterprise
Profit maximization
Competition
Government’s role is to only provide law and order, and assist in economic development.
SYSTEM/ CI-IARACTERISTICS ADVANTAGES DISADVANTAGES DESCRIPTION PURE MARKET 1. right to own 1. goods (type and 1. public does not ECONOMY property quantity) are choose socially 2. right to earn profit dictated by public efficient output 3. right to compete in 2. entrepreneurs have 2. mistreatment, business incentive to produce exploitation of 4. right to determine efficiently factors of production production 3. employees have 3. unfair competition 5. right to determine rights to choose arises method of conditions of 4. income distribution production employment disparities 6. right to employ 4. no political abuse 5. unemployment resources 5. exchange of 6. no social spending 7. right to choose your currency exists for poor job 8. consumer freedom 9. nogov’t involvement PURE COMMAND I. public ownership of 1 logical choices of 1. sometimes choice of ECONOMY factors of output output includes production 2. “more efficient” military spending 2. central planning of production —no 2. hidden economy strikes, -no unemployment 3. minor role of unemployment, -no 3. privileged class consumer exploitation remains 4. minor role of price 3. fairer distribution of 4. no incentives mechanism income 5. poor quality of 5. public investment goods produced 6. no profits 6. black markets 7. gov’t assignment of 7. political power jobs abuses
Knowt
Note
Studied by 32 people
