Economic systems

1. What are the three basic economic questions that every society must answers?

Every human society - whether it is an advanced industrial nation, a centrally planned economy, or an isolated tribal society – must face and solve three fundamental and interdependent economic questions.

• What goods and services are to be produced, and in what quantities are they to be produced?

• How are these goods and services to be produced?

• Who will receive and consume these goods and services?

2. What does the What question refer to?

Every economy has limited resources but the goods and services wanted by its people are numerous. So an economy faces the problem of what goods and services are to be produced and in what quantities. In other words it faces the problem of resources allocation between their alternative uses.

3. What are the ways of providing answer to the How question?

A second basic choice is that of how to produce. Most goods can be produced in more than one way by using resources in different quantities and combinations. It is often possible to vary the factor combination in manufacturing. Efficiency is a key criterion deciding how to produce. Efficiency means producing goods and services with a minimum of expense, effort, and waste.

4. What does the Who question mean?

No one can get all he wants. Whatever is produced in an economy it cannot be sufficient to meet everybody's wants. So a problem arises who will get and how much. This is the problem of distribution of wealth produced in an economy among different groups.

5. What is an economic system?

An economic system is a mechanism that deals with the production, distribution and consumption of goods and services in a particular society. It is an approach that a country uses to deal with the scarcity and achieve its economic goals.

6. What categories do economic systems fall into?

The economic system consists of people, institutions and their relationships to resources. It addresses the problems* of economics, like the allocation and scarcity of resources.

There are four main types of economic systems present in the world: the traditional economy, the command economy, the market economy, and the mixed economy.

7. What is a traditional economy?

The traditional economy is an economic system in which decisions about what, how, and for whom questions are made on the basis of customs, beliefs, religion, habit, and tradition. People’s economic roles are the same as those of their parents and grandparents. Traditions decide what these people work for a living, how their work is performed and who gets what is produced in such an economy.

8. What is a command economy?

Command economy is a economic system in which major decisions concerning the resources allocation are made by agencies of the government.

The command economy is a society where the government institutions make all decisions concerning what will be produced, how it will be produced, and for whom it will be produced.