BasicEconomicSystems-“Commandvs.MarketEconomies”
ThreeQuestionsanEconomicSystemmustanswer
1. Whatgoodsandservicesshouldbeproduced?
! Thisdetermineshowmuchofeachgoodsandservicetoproduce.
2. Howwillgoodsandservicesbeproduced?
! Whatmethodsandmixofresourceswillbeusedtoproducegoodsandservices?
3. ForWhomwillgoodsandservicesbeproduced?
! Thisisoftencalledthedistributionquestionbecauseitdecideswhichhouseholdsandindividualswillreceivegoodsandservicesorshouldthe
resourcesbeusedinotherways?*Thesethreequestionsarecloselyrelated.Theanswertoonedependsontheanswertoothers.Ifoneeconomy
distributesequallythenwillbemuchdiff.thanonewhereindividualsmaketheirowndecisions.
• mayvaryfromgovt.togovt.onnationallevel,oratstateandlocallevel.
• Broadsocialgoalslikeeconomicgrowthandstabilityareansweredineconomicsystems.
• Theinstitutionsandmethodsacountryusestoanswerthese3basicquestionsdeterminewhatkindofeconomicsystemexistsinthecountry.Thetwomajor
typesofeconomicsystemsarecommandandmarketeconomies.
Command
BasicQuestions
Market
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Agroupofcentralplannersbaseproductionon
politicallydeterminedgoals.Thegovernmentownsall
nonhumanresources.
Thereislimitedconsiderationofconsumer
preferences.Theyhaverelativelylittleinfluenceover
economicpolicy.
Thepeoplewhodecidearecalledthebureaucracy.
Thesegoalsreflectthepreferenceoftheplanners
insteadofcitizensofthestate.
Centralplannersdetermineacombinationof
productionresourcestobeusedbasedonthecountry’s
goals.
Forexample,ifthegoalistoraiseemployment,then
therewillbemoreemphasisonhiringmorepeopleand
littleregardwillbetoraisewages.Theendresultis
peoplemaybeemployedwhiletheystillremainin
poverty.
Whatgoodsandservices
shouldbeproduced?
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Consumerpreferences,producercosts,andprofit
considerationsdeterminewhattoproduce.
Inotherwords,thelawsofsupplyanddemand
determinewhatandhowmuchofgoodsandservices
aremade.Thelawofsupplyanddemandcreates
competitionamongproducers.
Howwillgoodsandservices
beproduced?
Individualbusinessesdeterminethemixofnatural,
human,andcapitalresourcesthatwillminimize
productioncostsandmaximizeprofits.
o Forexample,ifabusinesscanfindawayfor10people
todothesameamountofworkthat15weredoing,
previously,theywillletfiveworkersgobecausethat
willcutdownonproductioncosts(wages)
o Therefore,specializationandinternationaltrade
becomeimportantpartsofmarketsystems.Also,they
investineducationandtrainingtopromotegrowth
andproductivity.
Wagesandotherincomesaresetbycentralplanners.
Forwhomwillgoodsand
o Thevalueofagoodorserviceisdeterminedbybuyers
IntheU.S.thereisamodestredistributionofresources
servicesbeproduced?
andsellers.Buyersvoteonwhatgetsproducedwith
throughtaxesandspendingprograms,butmild
theirmoney.Thosethatspendtheirmoneyarethe
comparedtootherEuropeannations.
oneswhogetthegoodsandservices.
TheUnitedStatesisamixtureofcommandandmarketresources;therefore,itisaMixedEconomy.Mostgovernmentsintheworldaremixed.
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