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Key Decisions in Economic Systems

The document discusses the three key allocation decisions in economic systems: what to produce, how to produce, and for whom to produce. It outlines different economic systems, including planned, market, and mixed economies, highlighting their characteristics and decision-making processes. Additionally, it examines the advantages and disadvantages of a market economy, emphasizing efficiency, consumer choice, and potential social issues.

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23 views24 pages

Key Decisions in Economic Systems

The document discusses the three key allocation decisions in economic systems: what to produce, how to produce, and for whom to produce. It outlines different economic systems, including planned, market, and mixed economies, highlighting their characteristics and decision-making processes. Additionally, it examines the advantages and disadvantages of a market economy, emphasizing efficiency, consumer choice, and potential social issues.

Uploaded by

youkeldr
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Market Economic

system
The 3 key allocation decisions

tions arise from the basic economic problem:


1. [Link]
2. How
What whom
to
to to
produc
produc produc
e
e e?
1. What to produce?
How to produce?
For Whom
to
Distribut Produce?
Distribut e Based
e Equally on
income
An economic system

An institution,
organisation or a
Determines how
mechanism
resources are to be
allocated
Influences economic
behavior
Different economic systems
Different economic systems
individuals. They are
motivated by profit
Public and respond to
changes in the market
sector demand and supply.
vs
Private •Public sector:
Organizations
sector controlled by the
government. They
include government
run services and SOE’s
•The government decides:
i. What to Produce
Planned ii. How to produce
[Link] whom to produce
Economy • The government owns most land and
capital

• The government-owned firms (SOE’s)


produce everything based on
government directives

• The government is responsible for


distributing the products and
determining the wages

• Many essential services are free.


by buyers/ consumers
(demand)
•How to produce is determined
by private firms or suppliers
(supply)
Market •Who gets the products is
determined by the price
Economy
•Firms seek lowest cost of
production at high quality
•No or minimal government
•Land and capital is privately
Mixed Economy
•A combination of the planned and market economic
systems.

•Some resources are being owned and controlled by


private individual and firms.

•Others are owned and controlled by the government.


•An economic system
Market which relies on the market
forces of demand and
Economy supply to allocate
definition resources with minimal
intervention.
Key decisions
Features
of a
Market
Economy
Example
s
•In a market economy,
resources are
Price allocated through the
Mechanis price mechanism.
m •Price is determined by
the forces of demand
and supply
Functions
of price
mechanics
Price acts as a signal to
producers about changing
Price Bana
demand Appl
of consumers
Mechanism- nas es
how it works Increase
in
Decreas
e in
demand demand

Rise in Fall in
price price

Rise in Fall in
profit profit

Firms Firms
produce produce
Hire
more less
more Reduce
workers, workers,
use use less
more capital
Efficiency in a Market Economy

ALLOCATIVE PRODUCTIV DYNAMIC


EFFICIENCY E EFFICIENCT
Advantages of
the market
CONSUMER IS
economic system SOVEREIGN
EFFICIENCY (PRICE
MECHANISM)
FREEDOM OF CHOICE

LOW COST AND PRICES

HIGH QUALITY
INCENTIVES (PROFIT
MOTIVE)
Income and wealth
inequalities
Environmental issues
Disadvantages Social hardship
of the market
Wasteful competition
economic
system Monopoly (one or two big
firms)
Essentials may not be
provided (free rider
False Advertising
problem) can
distort choices
Summary

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