Ib Economics

Topics: Supply and demand, Economics, Consumer theory Pages: 23 (4859 words) Published: February 9, 2013

Economic Problem
* Unlimited wants, limited resources

Economic Systems
* Questions to answer:
1. What to produce?
2. How much to produce?
3. How to produce?
4. For whom to produce?
* Criteria to classify economic systems
1. Productive resources owned by private individuals (private sector) or government (public sector) 2. Role of market forces of demand and supply in allocating resources, determining prices, distributing incomes 3. Role of government in production of goods and services and provision of infrastructure and welfare services to the community * Market Economy

* Australia, USA, Japan, UK, Germany, France, Canada, Italy * What to produce and how much to produce are determined by the operation of price mechanism * Consumer preferences and consumer sovereignty determining pattern of production and quantities of output produced * How to produce is determined by profit motive

* Producers will attempt to use least cost combination of resources in producing output * To whom to distribute is determined by distribution of factor incomes * Those on higher incomes have a greater capacity to consumer goods and services compared to those on lower/middle incomes * Incomes determined by contribution to production as measured by marginal productivity * People with higher levels of skill, education, experience, training tend to earn higher incomes * Mixed Market Economy

* Private sector makes most of economic decisions, governments also play significant role in providing collective goods/services (health, education, transport), redistributing income * Government intervention:

* Regulator- establish and enforce framework of law and order, regulations which protect consumers and producers in market dealings * Provider of collective goods and services eg. defense, health, education, transport and welfare * Producer of goods and services market will not provide eg. public transport, health, education, defense, postal services * Redistribute income through system of taxation and welfare to ensure a more even distribution of income * Planned Economy

* China, Cuba, North Korea
* Government planning to allocate resources according to priorities for production set by a state planning authority * Government makes most of the production, distribution and exchange decisions * Sets prices and incomes according to government priorities/goals * What and how much to produce decided by government through central planning agency * Establish short, medium, long term plans which set out production priorities and production targets for priority industries * Output of raw materials

* Capital goods
* Defense equipment
* Government decides how resources are allocated
* How to produce determined by government
* Using estimates of resource balances and demand to allocate resources in sufficient quantities to meet output targets * To whom to distribute determined by government attempting to share out production on the basis of need and areas of state priority * High wages/salaries paid to workers in priority areas (military and heavy industry) * Prices set by planners;

* Basic foodstuffs, water, housing, electricity often subsidized * Health and education may be provided at zero cost * Transitional Economy
* Transition from planned economic systemsmarket economic systems * Result of:
* The election of democratic governments
* Desire of the majority of citizens to raise their incomes and standard of living by having more economic and political freedom * Establishment of markets and prices determined by market forces of demand and supply * Economies have opened up to foreign...
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