gcse economics - tools of the trade: economic systems

No two economies are organised in the same way, but they all have to solve three basic problems

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1. WHAT GOODS AND SERVICES TO PRODUCE
e.g. what cars, leisure goods etc.

2. HOW TO PRODUCE THE GOODS
e.g. how much machinery, which city to produce in

3. FOR WHOM TO PRODUCE
e.g. who should receive the goods and services

SHOULD THESE DECISIONS BE MADE BY PRIVATE FIRMS AND INDIVIDUALS OR BY THE GOVERNMENT?

THREE TYPES OF ECONOMIC SYSTEMS

1. FREE MARKET SYSTEM

These decisions are made largely by private individuals and firms. They decide what to produce, how to produce and for whom to produce. Therefore resources are allocated via the forces of supply and demand.

EXAMPLES

Levi’s and Wranglers have the freedom to make and sell jeans in whatever styles and at whatever prices.

Private firms would provide hospitals for patients. They would also decide how much to charge them.

2 COMMAND OR PLANNED SYSTEM

The decisions are made by the Government. The Government makes plans about what to produce, how to produce and for whom to produce. Therefore, resources are allocated by the Government through a system of planning

EXAMPLES

The Government would tell factories what jeans to produce and what price to sell then for
The Government would provide hospitals for patients. They will probably be free to use

3 MIXED ECONOMY

In this case some decisions are made by private individuals and firms, and some by the Government. Therefore some resources are allocated via the forces of supply and demand and others by the state planning system

EXAMPLES

Most leisure and household goods are produced by private firms
Certain essential services are provided free of charge by the Government e.g. hospitals, schools

THE UK HAS A MIXED ECONOMY

PRIVATE FIRMS ALLOCATING RESOURCES	GOVERNMENT ALLOCATING RESOURCES
Clothes e.g. Next, Top Shop	Hospitals
Some private schools	Many state schools
Industry e.g. Denby Pottery	Police force
Transport e.g. Midland Mainline	Army and weapons

ADVANTAGES OF EACH SYSTEM

FREE MARKET	COMMAND
There is lots of choice for consumers. Private firms understand people better than the Government	Essential services are provided free of charge
Firms aim to maximise profits therefore they try to meet customer needs	Everybody is guaranteed a job. There should be no unemployment
Individuals are allowed to start their own businesses. More enterprise	There should be less inequality in society
People have incentives. They can aim for higher wages or for a better job	Everybody is guaranteed housing
Firms are in competition with each other. They have to improve their efficiency and quality	Most people have the same government wage – whatever their job is

 ACTION

a. Imagine that the UK had a totally free market system i.e. all services were left to private firms. What problems might happen?
b. Why may a businessman or woman be happier in a free market system?
c. Why may the poor be happier in a command system?

 SMART THINKING

d. Which system is a) more efficient b) more equal / greater equality?