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Economics Lesson 4 Form 4

The document discusses resource allocation and different economic systems. It explains that economic systems must answer what to produce, how to produce, and for whom to produce. It then describes the characteristics and features of traditional, command, and free market economic systems.

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tyliqueantoine
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116 views9 pages

Economics Lesson 4 Form 4

The document discusses resource allocation and different economic systems. It explains that economic systems must answer what to produce, how to produce, and for whom to produce. It then describes the characteristics and features of traditional, command, and free market economic systems.

Uploaded by

tyliqueantoine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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PRODUCTION, ECONOMIC RESOURCES & RESOURCE

ALLOCATION

Economic Systems
OBJECTIVES:

Students should be able to;


• Explain the meaning of resource allocation
• Describe the three fundamental questions faced by each economic system
• Identify the different economic systems
• Describe the features of the traditional economy
• Describe the features of the free market economy
RESOURCE ALLOCATION
Is the act of dividing up the scarce resources of the economy to produce different
goods and services to meet the needs and wants of society. It is also the distribution
of the economy’s scarce resources among alternative uses.
• When allocating resources three basic questions must be answered. They are;
1. What to produce?
2. How to produce?
3. For whom to produce?
• What to produce?
• Firms and government must decide what goods and services are to be produced.
Should the economy produce only the basic items that people need, such as rice,
vegetables, meat, roads, schools & medicine? Or should the economy produce
other items which are wants, such as cars, designer clothing and candy? The
economy has to decide whether only needs will be satisfied. If wants are to be
satisfied, the economy must find a way to determine what people really want.
• How to produce?
RESOURCE ALLOCATION
• Firms and government must also decide on how output is to be produced. The method of production can be
capital intensive, meaning that a great deal of capital is used in relation to each unit of labour in the production
process. A labour intensive method can be adopted, where a great deal of labour is used in relation to each unit
of capital. Production can also take place on a large scale, where output is mass-produced, or on a small scale,
where output is custom-made to suit the individual needs of the buyer.
• For whom to produce?
• Economies must also decide how the goods produced with the limited resources available are to be shared out
amongst members of society. Some goods are distributed based on ability to pay the price. Whether you own a
luxury item depends, at least in part, on your ability to pay the price. Sometimes, the government might
distribute some goods based on need: subsidized housing and some other goods are distributed free of charge;
e.g. street lights.
• To allocate these scarce resources in the world, different economic systems have evolved. The four main
economic systems that have evolved are:
1. Traditional economic system
2. Command economic system (Planned economy)
3. Free market economy
4. Mixed economy
TRADITIONAL ECONOMIC SYSTEM
• A traditional economic system: is an economy that is self-sufficient. This
economic system is also known as the subsistence economy. Here man’s needs are
satisfied mainly through direct production; i.e. through his own production of
goods and services. There might be some surplus produced, which can be traded or
stored for later use. These economies do not use money so trade is limited to barter.
E.g. of traditional economies; isolated tribes of Asia, Africa & South America.

• Resource allocation
• Traditional economies are closed; they have limited contact with the rest of the
world. Therefore, resource allocation decisions are based on what the economy is
accustomed to doing. There is no innovation; therefore decisions on what to
produce, how to produce & for whom to produce remains generally the same over
time. Production decisions are based on long-established habits & for this reason
these economies are called traditional.
CHARACTERISTICS
• Characteristics
1. Ownership of resources is based on what is passed on to you by your
ancestors.
2. There is no formal government, though many of these societies have a
leader and systems to ensure justice and order.
3. Private individuals own and allocate resources.
4. Resource allocation is based on tradition.
5. There is no money in this economy, so trade is done by barter.
6. The economy is closed to outside trade and external influences.
COMMAND ECONOMIC SYSTEM
• The command economic system: in this system production is concentrated in
the hands of the state or government. The state owns all economic resources and
production decisions are made by the state. Eg. Cuba.
• Resource allocation
• The state decides what to produce based on what the government thinks is best for
all members of society. There is a public sector, where government-owned firms
operate to allocate resources and to produce goods & services. In some command
economies, there is also a planning authority that makes planning decisions on
behalf of the state.
• The state decides how to produce based on what resources it has, the level of
technology present and other government goals. The state might use a labour-
intensive form of production even though it has the technology to produce a good
more efficiently. This could be because it wishes to create jobs for the population.
• The state also decides for whom to produce, based on the needs of the population
and might direct labour into whatever work is thought necessary.
CHARACTERISTICS
• Characteristics
1. The state owns all the factors of production and business units
2. The government assumes full responsibility for the economy – the government
makes laws, provides infrastructure and is involved in production.
3. There is no private sector.
4. The state, through the central planning authority, allocates resources.
5. All workers are employed by the state.
6. There is restricted choice for the consumer, since producers are told what to
produce by the central planning authority and there are not many firms producing
the same product.
7. Prices are fixed – shortages do not lead to price increases but to some form of
rationing.
8. There are no shareholders in companies and production is not profit-driven.
QUESTIONS FOR STUDENTS
• Name the three fundamental questions faced by each economic
system
• List the different economic systems
• Give two features of the traditional economy
• Give two features of the command/market economy

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