1.)What is economic system?

- is a system of production and exchange of goods and services as well as

allocation of resources in a society.
- An organized way in which a state or nation allocates its resources and
apportions goods and services in the national community.
2.)What are the types of economic system?

In a command economy, the government decides the answers to the three

basic questions. It decides what will be made, how they will be made, and who
will get them. Recently, pure command economies have usually been
communist countries. Good examples today would be North Korea and China. In
a command economic system or planned economy, the government controls the
economy. The state decides how to use and distribute resources. The
government regulates prices and wages; it may even determine what sorts of
work individuals do. Socialism is a type of command economic system.
In a market economy, consumers decide the answers to the three questions.
They do this by their choices of what to buy. No one tells companies what to
make -- they make whatever they think will sell. If they choose wrong, they go
out of business. Most developed economies today are predominantly market
economies. The US, Japan and Germany are all market economies. In market
economies, economic decisions are made by individuals. The unfettered
interaction of individuals and companies in the marketplace determines how
resources are allocated and goods are distributed. Individuals choose how to
invest their personal resourceswhat training to pursue, what jobs to take, what
goods or services to produce. And individuals decide what to consume. Within a
pure market economy the government is entirely absent from economic affairs.
In a traditional economy, the three questions get answered by referring to
tradition -- you make what has always been made, in the way it has always been
made, etc. There aren't really any countries whose whole economies are
traditional. The closest you could get to this would be Afghanistan or Bhutan -places where there is little connection to the global economy. The work that
people do, the goods and services they provide, how they use and exchange
resources all tend to follow long-established patterns. These economic
systems are not very dynamicthings dont change very much. Standards of
living are static; individuals dont enjoy much financial or occupational mobility.
But economic behaviors and relationships are predictable. You know what you
are supposed to do, who you trade with, and what to expect from others.
A mixed economic system combines elements of the market and command
economy. Many economic decisions are made in the market by individuals. But
the government also plays a role in the allocation and distribution of resources.

The United States today, like most advanced nations, is a mixed economy. The
eternal question for mixed economies is just what the right mix between the
public and private sectors of the economy should be.
3.)What are the 4 economic problems?
use. If the available resources were abundant the problem of how goods should be produced would
not arise and consequently which ever method efficient or inefficient would not have poured problem
for the Thus scarcity of resources is the root cause of all economic problems.

What to produce:The community has to decide which goods and in what

quantities are to be produced. The society has to choose among numerous
consumer goods and decide about allocation of resources between them. The
society has to make a choice between necessities and luxuries.The decision
about the allocation of resources between consumer goods and capital goods is
very important from the point of view of economic growth. Society has to
determine the specific quantity of capital goods and consumer goods.Once the
goods to be produced have been decided, the society must attach proper
weights to each of the good it chooses to produce. For example wheat and
hospitals are selected to be produced. But the goods cannot be produced
unlimitedly.Then society would decide how much wheat, how many hospitals are
to be produced. Only the question of what quantity of above goods is to be
produced should be kept in mind.
How to produce:After the society has decided what to produce the next
problem arises as how to produce. This means which technique of production is
to be used. The society is to decide what combination of resources is too applied
for the production of goods. There are various techniques of production available
in the economy. Each technique uses a different combination of resources.For
example cotton cloth can be produced either by handloom, or by power loom.
The techniques of handloom require more labour relative to capital. Thus it is
labour intensive techniques. On the other hand power loom involves more
capital relative to labour. Thus it is capital intensive technique.
For Whom to Produce: In a free market economy the money income of a
person decides how much share he is to receive from the national output. The
greater the income, the greater the share of output. Money income is obtained
in two ways. Firstly, money income is obtained by selling one's labour services.
Secondly income can be made from property such as land and other forms of
capital, in form of rent, interest and profits. Difference in the ownership of
property leads to difference in income.

How much to grow: Resources should be allocated for the production of

capital goods. If the resources are not allocated for investment future production
will suffer a serious setback. If no provision is made for future, the future
productive capacity and the level of living will decline. That is why a society
would provide for its growth of productive capacity.

How People Make Decisions

1. People Face Tradeoffs - To get one thing, you have to give up
something else. Making decisions requires trading off one goal against
another.
2. The Cost of Something is What You Give Up to Get It - Decisionmakers have to consider both the obvious and implicit costs of their
actions.
3. Rational People Think at the Margin - A rational decision-maker takes
action if and only if the marginal benefit of the action exceeds the
marginal cost.
4. People Respond to Incentives - Behavior changes when costs or
benefits change.
How the Economy Works as A Whole
5. Trade Can Make Everyone Better Off.
Trade allows each person to specialize in the activities he or she does
best. By trading with others, people can buy a greater variety of goods or
services.
6. Markets Are Usually a Good Way to Organize Economic Activity.
Households and firms that interact in market economies act as if they are
guided by an "invisible hand" that leads the market to allocate resources
efficiently. The opposite of this is economic activity that is organized by a
central planner within the government.
7. Governments Can Sometimes Improve Market Outcomes.
When a market fails to allocate resources efficiently, the government can
change the outcome through public policy. Examples are regulations
against monopolies and pollution.
How People Interact

8. A Country's Standard of Living Depends on Its Ability to Produce

Goods and Services.
Countries whose workers produce a large quantity of goods and services
per unit of time enjoy a high standard of living. Similarly, as a nation's
productivity grows, so does its average income.
9. Prices Rise When the Government Prints Too Much Money.
When a government creates large quantities of the nation's money, the
value of the money falls. As a result, prices increase, requiring more of the
same money to buy goods and services.
10.
Society Faces a Short-Run Tradeoff Between Inflation and
Unemployment.
Reducing inflation often causes a temporary rise in unemployment. This
tradeoff is crucial for understanding the short-run effects of changes in
taxes,government spending and monetary policy.
Ropa, Camille Patricia Ann S.
BS PSY - 2A

1.) What is Economic system?

An organized way in which a state or nation allocates its resources

and apportions goods and services in the national community.

An economic system is a system of production and exchange of goods

and services as well as allocation of resources in a society.

Frameworks for the distribution and allocation of goods and services in

a nation or society.

2.) What are the types of economic system?

Traditional - A traditional economic system is one in which each new

generation retains the economic position of its parents and
grandparents. Traditional economies rely on the historic success of
social customs. South America, Asia and Africa support some
traditional economies of thriving agricultural villages. Tradition decides
what an individual does for his living, so industry, clothing and shelter
are the same as in previous generations.

Market Market economies are based on consumers and their buying

decisions rather than under government control. Market trends and
product popularity generate what businesses produce. The producers
choose how to make products based on the most economically sound
decision: that might mean machine labor to save costs or human labor
for specific skills. The buyers decide who gets which products by what
they are willing to pay for what they want.

Command - One example of a command economy is communism. In a

government-directed economy, the market plays little to no role in
production decisions. Command economies are less flexible than
market economies and react slower to changes in consumer
purchasing patterns and fluctuations in supply and demand.

Mixed - A mixed economy combines qualities of market and command

systems into one. In many countries where neither the government nor
the business entities can maintain the economy alone, both sectors are
integral to economic success. Certain resources are allocated through
the market and others through the state. Theoretically, this system
should be able to combine the best policies of both systems, but in
practice the proportion government controls and response to market
forces varies. Some countries rely more on market emphasis and
others on state planning.

3.) What are the four economic problems?

What to produce - The community has to decide which goods and in what quantities are to be
produced. The society has to choose among numerous consumer goods and decide about
allocation of resources between them. The society has to make a choice between necessities
and luxuries.

How to produce - After the society has decided what to produce the next problem arises as
how to produce. This means which technique of production is to be used. The society is to
decide what combination of resources is too applied for the production of goods.

For whom to produce - For whom to produce means how the national product is to be
distributed among the members of the society. In view of the scarce resources and output,
the society has to decide who should get how much from the total national output.

How much to grow - The scarce resources should not be spent for consumption goods only.
Resources should be allocated for the production of capital goods. If the resources are not
allocated for investment future production will suffer a serious setback.

Mankiws 10 Principles
How People Make Decisions
1.

People Face Tradeoffs. - To get one thing, you have to give

up something else. Making decisions requires trading off one
goal against another.

There is no such thing as a free lunch. To get one thing that we like, we usually
have to give up another thing that we like. Making decisions requires trading one
goal for another.

For example, tax paid by wealthy Indians and then distributed to poor may improve
equity but lower the return to hard work and therefore reduce the level of output
produced by our resources.

2. The Cost of Something is What You Give Up to Get It. Decision-makers have to consider both the obvious and implicit
costs of their actions.

Whatever must be given up in order to obtain some item.

3.

Rational People Think at the Margin. - A rational decisionmaker takes action if and only if the marginal benefit of the
action exceeds the marginal cost.

Consumers want to purchase the bundle of goods and services that allows them the
greatest level of satisfaction given their incomes and the prices they face.

Firms want to produce the level of output that maximizes the profits.

4. People Respond to Incentives. - Behavior changes when costs or

benefits change.

When the price of a good rises, consumers will buy less of it because its cost has
risen.

5. Trade Can Make Everyone Better Off.

Trade allows each person to specialize in the activities he or
she does best. By trading with others, people can buy a greater
variety of goods or services.

6. Markets Are Usually a Good Way to Organize Economic

Activity. Households and firms that interact in market economies act as
if they are guided by an "invisible hand" that leads the market
to allocate resources efficiently.
7.

Governments Can Sometimes Improve Market

Outcomes. When a market fails to allocate resources efficiently, the
government can change the outcome through public policy.

8. A Country's Standard of Living Depends on Its Ability to

Produce Goods and Services. - Countries whose workers produce a
large quantity of goods and services per unit of time enjoy a high standard of
living. Similarly, as a nation's productivity grows, so does its average income.

9. Prices Rise When the Government Prints Too Much

Money. - When a government creates large quantities of the nation's money,
the value of the money falls. As a result, prices increase, requiring more of the
same money to buy goods and services.

10.Society Faces a Short - Run Tradeoff Between Inflation and Unemployment.

Reducing inflation often causes a temporary rise in unemployment. This
tradeoff is crucial for understanding the short-run effects of changes in taxes,
government spending and monetary policy.