MARKET ECONOMIES One way of classifying different economic

MARKET ECONOMIES

One way of classifying different economic systems is by the amount of government influence on how they are conducted. Most economic systems fall between one of the following.

MARKET ECONOMIES… In a market economy the use and distribution of economic resources is decided by consumers and producers. Economic resources (means of production) are privately owned by individuals who wish to use them to make a profit. If enough people want to buy something at a certain price the owners of the economic resources will use them to produce the demanded product in the hope of selling it for a profit.

MARKET ECONOMIES… Private businesses then operate in a way that is both effective and efficient so they can maximise profit. Businesses produce and supply what consumers want or demand in the hope of making a profit. The profit incentive motivates businesses to produce products that will satisfy consumer demands. Economies that operate under this principle are known as market economies. Resources are used to produce what consumers want to buy, (demand), rather than what the government tells them to produce. A market economy uses a principle known as the price mechanism to determine how the economic resources of the country will be used and distributed.

THE PRICE MECHANISM… The price mechanism determines: a. What to produce (How to use scarce economic resources) b. the prices of products to be sold

PLANNED ECONOMY… In a planned economy the government answers all three key economic questions and directs all economic activity. What is to be produced? Factors of production are then directed to doing this. Workers are told where to work and instructed to move where their designated job is located. Factories and other businesses are told what they are required to produce and in what quantities. How things are to be produced. Government instructs producers on methods of production to be used. Who gets the finished products: Government distributes, or allocates, finished products. This may be according to who is prepared to wait in line or any other way they decide During the 20 th Century there were several planned economies. Much of Eastern Europe including East Germany, the USSR and Poland were planned economies. Today, planned economies continue to exist in Cuba, North Korea and Laos.

PLANNED ECONOMY… THE BASICS • Government makes all economic decisions about how the economic resources are used. • All wealth is collective meaning individuals are not allowed to own economic resources. Government owns and controls economic resources on behalf of the people • Planned economies are usually AUTHORITARIAN in nature with people generally expected to follow the orders issued by the government without question.

ADVANTAGES OF… A PLANNED ECONOMY • The government can easily put economic resources to best use for the country. During times of war or national crisis governments often resort to taking over ownership of the national economic resources and making economic decisions as to their best use for the country’s best interests. • The government can begin to build expensive economic infrastructure, such as dams and roads without having to wait for private owners of capital to do this.

ACTIVITY… (Worksheet E - Q’ns)