1.2 Resource Allocation and Economic Systems

Three Economic Questions

In every economy there are three questions that must be answered:

• What goods and services will be produced? Since scarcity exists, no society has the resources to produce everything that the people want, leading to this question. An economy has to decide what goods and services are most wanted and needed. For example, when an economy chooses between building or fixing roads, or buying textbooks for schools. This can also involve making decisions like whether the government should conserve wilderness areas or open them up for development.

• How will goods and services be produced? This question deals with how businesses and other producers should go about producing various goods and services. For example, asking whether pipes should be made out of copper or plastic, or whether clothing should be made by machines or made by hand.

• For whom will the goods and services be produced This question is answered after the production of goods and services, as it is decided who should be allowed to consume the goods and services that have been produced. For example, should it be based on a first-come, first-served basis or based on whether the consumer can afford the goods or services?

Types of Economic Systems

Centrally-Planned (Command) Economic System

In this type of economic system, the government makes the basic economic decisions, answers the three basic economic questions, and controls production and wages. Some examples of command economies are North Korea and Cuba. 🇰🇵 🇨🇺

The advantage of this type of economic system is that it is easier to produce goods and make sure everyone is receiving the basic necessities. They are also able to gather resources quickly and on a large scale.

The disadvantage of this type of economic system is that the system is not responsive to consumers' preferences, discourages innovation, and severely limits consumers' choices. This may lead to the development of a black market in command economies.

Market Economic System

In this type of economic system, economic decisions are guided by price changes that occur as buyers and sellers interact in the marketplace. The government has a limited role in this system, generally only preventing monopolies. Some examples of market economies are Hong Kong and New Zealand. 🇭🇰🇳🇿

The main advantage of this economic system is that there is a lot of competition, which keeps prices low and offers many options for consumers to choose from. This system is also driven by self-interest, which ensures that the most desired goods and services are produced. Innovation is rewarded.

The disadvantages include a large wealth disparity for individuals living in this economic system and very few public goods.

Mixed Economic System

Mixed economies combine aspects of both free markets and command economies. Private property rights are protected and there is a certain level of economic freedom, but the government can intervene in an effort to meet societal aims and avoid market failures. The United States is a great example of a mixed economic system. 🇺🇸

An advantages of this type of economic system is that the government can own some public programs like education and transportation, while still keeping the benefits of a market economy, such as encouraging innovation and allowing prices to depend on supply (producers) and demand (consumers). Another advantage is that it rewards the most efficient producers with the highest profit.

This type of economic system can take on the disadvantages of other types of economies depending on which characteristics it emphasizes. For example, if a certain mixed economy emphasizes the free market aspect, it can leave some members of society without any government support and make businesses hard to regulate.