Resource Allocation Decisions (Cambridge International IGCSE Economics)
Economic systems
Spec point — Economic systems
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An economic system is the way a country or society organises the production, distribution and consumption of goods and services to solve the problem of scarcity
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In order to solve the basic economic problem of scarcity, economic systems emerge or are created by different economic agents within the economy
- These agents include consumers, producers, the government and special interest groups (e.g. environmental pressure groups)
- Any economic system aims to allocate the scarce factors of production*
Three types of economic systems
1. Market economy (capitalist/free market system)
- Decisions are made by individuals and private firms
- It is based on supply and demand
- There is little to no government intervention
2. Planned economy (command economy)
- The government makes all key decisions about what, how and for whom to produce
- Resources are owned and controlled by the state
3. Mixed economy
- Combines features of both market and planned economies
- The private sector and government share decision-making
- Most modern economies are mixed economies
Exam Hint The above knowledge sits in a different place in your syllabus. However, it has been included here as it provides a nice link in the understanding between scarcity, economic systems and the three basic economic questions – they are inextricably linked
The three basic economic questions
Spec point — "• what to produce • how to produce • who to produce for"
The three basic economic questions
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Each economic system has to ask and answer three basic questions
- Each system answers them differently
How the three questions are answered determines the economic system of a country
- Economic decisions need to be made to answer three important questions
- What to produce?
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As resources are limited in supply, decisions carry an opportunity cost
- For example, should a government invest limited public funds in better rail services or more public hospitals?
- How to produce it?
- Would it be better for the economy to have labour-intensive production so that more people are employed, or should goods and services be produced using machinery?
- For whom are the goods and services to be produced?
- Should goods and services only be made available to those who can afford them, or should they be freely available to all?
How does each system answer these questions?
| Type of system | What to produce? | How to produce? | For whom? |
|---|---|---|---|
| Market system | - Demand and supply (the price mechanism) | - Most efficient, profitable way possible | - Those who can afford it |
| Mixed system | - Demand, supply and the government | - Some efficiency but also a focus on welfare/well-being | - Those who can afford it, plus some provision to those who cannot afford it |
| Planned system | - The government | - Ensure everyone has a job | - Everyone |
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