Question

As you saw in this​ chapter, an economy must answer three key​ questions: what to​ produce, how to produce​ it, and who receives the goods or services produced. A common complaint about capitalism is that it creates a vast income inequality. Explain how the concepts from this chapter​ (market, market​ economy, equity, allocative​ efficiency, centrally planned​ economy, normative​ analysis, and positive​ analysis) can be used to answer this complaint of capitalism.

Answer 1

An economy is a framework within which economic activities are performed. where is an economic system is a system in which decisions regarding what to produce, how to produce for whom to produce are taken.

This economic system can be further classified as:

1. Centrally planned economy/ socialist economy

2. Capitalist economy/ market economy

3. Mixed economy

Under the centrally planned economy, the decisions regarding Central problems are solved by the state itself. There is no interference of the private sector. The objective of this type of economy is to maximize the social welfare. however the quality of goods and services that are produced in this type of model is low. This for the results in low standard of living. Also the rate of GDP growth is also very slow.

In the capitalist economic model, the decisions regarding what to produce how to produce and whom to produce are solved by the private sector. The role of government is limited to to maintaining law and order. All the goods and services are produced with profitability motive. The prices of goods and services are high. The quality of goods and services is also improved. And there is improvement in the standard of living of people. However the capitalism model results in income inequalities. Income inequality refer to the gap between rich and poor people. As the private sector only produces with profit motive and thereby the keep the prices of goods and services high. Only the rich people or the people with more purchasing power are able to afford goods and services. Where is the poor people are deprived of of these goods and services as they have low purchasing power. This widen the gap between the rich and poor. This is known as income inequalities.

Also the model of capitalism is a threat to equity objective. Equity refers to that benefits of growth must be availed by each and every section of the society. However capitalism model only focus on Profit maximization.

In the mixed economy economy the decisions regarding what to produce how to produce and for whom to produce taken by both public and private sector. this type of model try to maintain balance between profit maximization and social welfare. Both the government and the private sector participate in the economic system.