Each society is faced with a problem concerning their economic state. The economic problem is that there are limited resources in relation to unlimited wants. This problem brings about the need for a system to answer questions like what to produce, how to produce, how much to produce and how to distribute production. An economic system is the organisational and institutional pattern through which choices are made about which wants to satisfy, and how to allocate resources to do this. The different economic systems include planned economies, market economies and mixed economies. Australia has a mixed-market economic system in which there is a mixture of control by the government and freedom of individual enterprise and in which the basic economic questions are answered in the market place.
An economic system must answer the questions 'what to produce?', 'how much to produce', 'how to produce' and 'for whom to produce'. The economic problem creates a situation where economies must decide which good or service to produce at the cost of another good or service not being produced, as a result of the limited resources available. For example, toffee apples are produced at the opportunity cost of fantails. The decision of the quantities the good will be produced in must also be determined. The question of 'how to produce' refers to the combination of resources used to produce a good or service. For example, a particular confectionary item can be produced by human effort (labour) or machines (capital), hence, the decision of which is the more efficient means of production must be made. Who gets the goods and services that are produced is the final decision that is made in production; it determines to whom the goods and services will be distributed to. There are two theoretical extremes of how these questions may be answered - the planned and the market economies. This does not fully exist in reality though.
Different economies handle the economic problem in different ways depending on what type it is and how it operates. In a planned economy, there is social ownership of resources, which are controlled by the state (communism). A central bureau or group of people who fix prices to encourage or discourage consumption makes the basic economic decisions, which is done for the 'good of the community'. Individuals play a minor role in deciding what is produced as the group sets plans for the production of capital and consumer goods. Methods of production are determined by what is socially desirable, so the central bureau may not necessarily choose the method of least cost because the profit motive is not as important. Income distribution in a planned economy is much more equal than in others because decisions are based on the social good of the community. Although the state determines incomes and prices, workers have some freedom to choose where to work, according to their skills and qualifications. Price or market mechanism has little influence on allocation of resources -once again, it is largely dictated by the central bureau. The government is involved in most aspects of the economy and there are more social and moral incentives for individuals rather than material ones. However, the few remaining communist countries (China, Vietnam and Cuba) have been encouraging a more market- orientated approach lately.
On the other end of the economic spectrum, the market economy (also called capitalism, free enterprise and laissez-faire) is characterised by individuals and private firms that are motivated by self-interest and profit motive. It denotes an economic system with a high degree of economic freedom and minimalist government intervention. The role of government in economic life is restricted to the provision of infrastructure required for economic activity and welfare. In the classical model of capitalism, individuals have the right to earn incomes in the form of rent, interest, and profit from their own business. Freedom of...
Bibliography: Dixon, T. (2005) The market economy: preliminary course 2005 Sydney: Leading Edge Education.
Riley, T. Year 11 economics
Notes from Enoch Lau
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