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Economic systems Cheat Sheet (DRAFT) by

The basic economic questions, 3 types of economics

This is a draft cheat sheet. It is a work in progress and is not finished yet.

The resource allocation problem

Limited resources lead to scarecity which leads that every economy has to choose what Gs&Ss to produce with their limited resources. Some economies are better off while others do not posess so many resources as they would need.
Resource allocation - is choosing what to produce and how much land, labour and capital we will need to produce certain Gs&Ss

The basic economic questions

What to produce?
What Gs&Ss will be produced? In scarecity not all of them can be taken care of.
Which needs and wants will be satisfied?
How to produce?
Choosing which method of production to use.
For whom to produce?
Whose wants and need will be satisfies? This depends on peoples opinions or it involves a value judgement.

Economic systems

How a national aconomy answers the basic economic questions is called an economic system.

Market economy - questions

What to produce?
Only what is desired by the consumers
How to produce?
The cheapest method available.
For whom to produce?
The one's with the most money.

Market economy

Firms and households in the private sector determine the allocation of resources.
There is no role for govern­ment.
All resources in the market economy are owned by people and firms - all of them make as much profit as possible.
If a product or service is selling well firms increase the price they charge for higher profit as they know that people will still buy it.

Price mechanism

High prices are indicate the desired products by people.
Low prices indicate the firms should change the allocation of their resources.

Advantages of the market system

The free market responds quickly to people's wants
Private firms adapt quicker to make more profit.
Wide variety of Gs&Ss
They want to meet consumer's wants.
Encour­aging new and better methods and machines to produce Gs&Ss
The market system relies on producers to decide the basic questions
There is no need to employ people to make decisions.

Disadv­antages of the market system

Factors of production will be employ only if they are needed
People will become unempl­oyed.
Free market can fail to provide some Gs&Ss
Public goods - street lighting or flood barriers, etc.
The free market encourages consum­ption of harmful Gs
No regula­tions by govern­ment.
The social effect of production may be ignored
No pollution regula­tions by govern­ment.
The free market allocates more Gs&Ss to consumers who have more money than others
Whealthier people can have better financial freedom.
These are the reasons why mixed economy is needed.

The mixed economy - questions

What to produce?
Based on regula­tions by the govern­ment.
How to produce?
Coping with regula­tions but still the cheapest way.
For whom to produce?
For those who want to buy it.

The mixed economy

Ownership and decision making ovefr the scarce resources are split between private and public sector.
Mixed economy combines market system with and interf­erance of govern­ment.
Still the aim is to make as much profit as possible.
Government also owns some scarce resource which they think their country needs and wants.

The benefits of mixed economy

The government can provide public Gs
Such as defence, street lightning or merit goods like healthcare or education.
They get money for this by taxing people.
Government also owns some scarce resources
In case of need government can provide.
Reducing unempl­oyment
Creating job spots in public companies.
Decrease the consum­ption of harmful Gs
They make them illegal.
Prevent pollutions
Places fines and restri­ctions on pollution done by firms.

Planne­d/C­entral economy - question

What to produce?
government decides
How to produce?
government decides
For whom to produce?
for everyone

Planne­d/C­entral economy

An extreme opposite of a market economic system.
Almost all decisions are taken by organi­zations owned or accoun­table to govern­ment.
Individual consumers, firms and households have little control over tha allocation of resources.
The government provides inform­ation to firms what exactly they should produce and where people should work.
Firms have no motivation to do better and the quality of goods was poor or there was a shortage.

Developed and less developed economies

Developed economies
Countries with a high level of economic develo­pment.
High average income, good quality housing, legal and education systemas, modern infast­ructure and wide range of indust­ries.
Less-d­eve­loped economies
Developing countries with a low level of economic develo­pment and well-b­eing.
An economic condition when there are too many people and too few resources.

Reasons for the underd­eve­lopment of an economy

High population growth
Available Gs&Ss have to be shared among more people.
Dependance on the production and sale of agricu­ltural products
Developed countries by resources at low prices and proceed to make Gs&Ss that they sell to less developed countries at high prices.
Poor infras­tru­cture
Poor transport and commun­ication networks.
Lack of capital
LDC's have to spend their tight budget on foor for their enormous population there is no more moeny for them to spend elsewhere.
Low quality of education
Low levels of skills and qualif­ica­tion.

Possible solutions or cures for underd­eve­lopment

Some countries believe, that LCD's should not rely on help provided by other states.
Foreign aid
Food aid - necessary but if free food is given to LCD's their local products will not be sold - urbani­zations to find work in the cities
Financial aid - giving money to developing countries on condition that they spend it on a particular project e. g. an airport. Usually providing countries depend on buying the material needed for this fromt hem at high prices. LCD's have no say to decide how to spend this financial aid.
Techno­logical aid - developed countries sometimes provide LCD's with machinery and techno­logy. The problem is that there are very few people who can work with it.
LCD's may be unable to repay it.
Producing and selling Gs&Ss to developed countries would help LCD's out but developed countries are not willing to buy them because they fear unempl­oyment. Once LCD's become richer, they may buy Gs&Ss also from developed countries.
Population control
More people in poor countries means less resources per person. Better education on family planning would help to reduce population growth and to improve standards of living.