The Nature and Purpose of Economic Activity

  • Created by: LShan261
  • Created on: 07-04-15 20:32

Basic economic decision

  • What should be produced in the economy?
  • How should production be organised?
  • For whom should production take place?

What. How. Whom.

W. H. W.

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Economic systems

There are Four main economic systems:

  • A subsistence economy
  • Free Market economy
  • Command economy
  • Mixed economies
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A Subsistence Economy

  • Little specialisation and trade
  • Low productivity = low incomes = poor standard of living
  • Generally live in family groups and grow thier own crops - are mostly self-sufficient
  • Little surplus production to export
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Free Market economy

  • Economic decisions made through the free market mechanism
  • What to produce is decided by profitability
  • High demand = increased prices = increased profitability
  • High prices and high profits indicates the producers to increase production
  • The quantity supplied responds to the needs and wants expressed through price mechanism
  • Consumer acts as the 'sovereign'.
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Command economy

  • All economic decisions are made by the government
  • Requires economy planning by the State
  • The price mechanism has no active role
  • Is meant to benefit all the citizens of the country
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Mixed economics

  • A combination of free market and command economy
  • Requires a private and public sector
  • Majority of countries use a mixed economy
  • In order for an economy to become mixed:
    • Privatisation of state industries
    • Encourage foreign investment
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Basic economic problem

  • Infinite wants but limited resources. 
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Central purpose of economic activity

  • Provide goods and services to satisfy needs and wants. 
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