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What are the four functions of an economic system? Contrast the w...

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What are the four functions of an economic system? Contrast the way in which the market economy and planned economy attempt to solve the economic problem.

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  • March 3, 2005
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The four functions of an economic system are what to produce, how much to produce, how to produce and whom to distribute to.

The market economy is one that is controlled by the people and there is little government intervention. It is also known as a free enterprise economy.

The planned economy is one that is controlled by the government and there is a lot of government intervention into the way in which the economy runs.

They both try and solve the economic problem of trying to satisfy mans unlimited wants with relatively scarce resources in different ways.

The market economy tries to solve the economic problem by letting demand and supply equal price. So therefore the more people that want it, the higher the price will go up until price matches supply. This tries to solve the economic problem by rather letting consumers themselves figuring out how much they are prepared to pay for items. Therefore consumers need to work out how much they are willing to pay for their own products.

The planned economy however is all determined by the government so the government says how much is produced etc. and controls all the economic priorities, resources and allocates production.

What to produce refers to what type of product you are going to produce with your allocated resources. Sometimes you have to make a choice between what you are producing and this is referred to as the opportunity cost. The choice you have to make to allocate your resources.

In a market economy the demand chooses where these resources go and the market decides what to produce.

However in a planned economy the government determines the allocation of resources and production.

How much to produce refers to the quantity that is going to be produced with the use of the available resources.

If you make too much, rather have a lot of supply and little demand then you are not going to sell your products well and to sell your products your price will have to be quite low. If you...