Resource Allocation Decisions

Economic systems

Economic systems

• An economic system is the way a country or society organises the production, distribution and consumption of goods and services to solve the problem of scarcity

• In order to solve the basic economic problem of scarcity, economic systems emerge or are created by different economic agents within the economy

  • These agents include consumers, producers, the government and special interest groups (e.g. environmental pressure groups)

  • Any economic system aims to allocate the scarce factors of production

Three types of economic systems

1. Market economy (capitalist/free market system)

• Decisions are made by individuals and private firms

• It is based on supply and demand

• There is little to no government intervention

2. Planned economy (command economy)

• The government makes all key decisions about what, how and for whom to produce

• Resources are owned and controlled by the state

3. Mixed economy

• Combines features of both market and planned economies

• The private sector and government share decision-making

• Most modern economies are mixed economies

The three basic economic questions

The three basic economic questions

• Each economic system has to ask and answer three basic questions

  • Each system answers them differently

• Economic decisions need to be made to answer three important questions

1. What to produce?

   • As resources are limited in supply, decisions carry an opportunity cost

     • For example, should a government invest limited public funds in better rail services or more public hospitals?

2. How to produce it?

   • Would it be better for the economy to have labour-intensive production so that more people are employed, or should goods and services be produced using machinery?

3. For whom are the goods and services to be produced?

   • Should goods and services only be made available to those who can afford them, or should they be freely available to all?

How does each system answer these questions?