Question

2. Economic decisions are made differently in different economic systems…

a. What are the basic economic decisions that every economic system must make?

b. List the three basic economic systems. How does each answer the basic economic questions?

c. List and explain four (4) characteristics of the market economy.

This question is assigned to Group 2

Answer 1

a. The basic economic decisions that every economic system must make are -

i. What to produce - An economic system needs to decide the goods it must produce and their relevant quantities.

ii. How to produce - Society must also decide how to produce these goods. It can either use a labor intensive or capital intensive technology.

iii. For whom to produce - It is important for an economy to decide for whom its producing these goods. Since resources are scarce, it must not be a case that resources are wasted over production of goods with no buyers.

b. The three basic economic systems are -

i. Centrally Planned economy: In such an economy, the government takes the decision of what to produce, how to produce and for whom to produce. The state decides these decisions on behalf of all citizens usually on the principles of social justice.

ii. Market economy: In a market economy, all economic activities are linked to the market forces of demand and supply. Resource allocation is decided by free markets. Market play a big role in deciding what to produce, how to produce and for whom to produce instead of state.

iii. Mixed economy: Lastly, a mixed economy is one that has features of both a centrally planned economy and market economy. The state undertakes production activity in certain sectors while market play a role in other sectors.

Below are some characteristic of market economy:

a. Property rights: In a market economy, individuals or firms are assigned property rights that govern ownership of real property, financial property or intellectual property.

b.Competitive markets: This is one of the most important features of a market economy. Forces of demand and supply determine the allocation of resources in a market economy.

c. Freedom of choice and free enterprise: Individuals and firms have the right to decide whether they want to participate in economic activity or not. Such a flexibility may not exist in a command and control economy where production is undertaken under direction of state.

d. Role of government: Government doesn't interfere in the functioning of the competitive markets. Role of government is limited to a few activities such as overseeing law and order.