Answer the following questions on the contents of the text.

1. What is the difference between economic goods and economic services? Give
examples to illustrate them.

2. What are the basic categories of the factors of production?

3. Are consumer goods considered to be factors of production? What is the
difference between consumer and capital goods?

4. How can you prove that labour is an essential factor of production?

5. Are there any other factors that influence production in the modern world?

6.What are the four main sectors of economic activity in modern economies?

7.What is opportunity cost?

 

Read the text again and say if the following statements are true or false according to the information in the text.

1.Economics is the study of how individuals and society choose to use unlimited resources in an effort to satisfy people's limited wants.

2.Most people’s needs are unlimited.

3.Economists divide the factors of production into three basic categories.

4.The four factors of production must be combined and organized before production can take place.

5.Primary sector involves the transformation of raw or intermediate
materials into goods.

6.Quaternary sector involves the research and development needed to
produce products from natural resources.

7.Opportunity costis an important concept in macroeconomics.

 

Match the beginnings and endings of the following statements.

1.economic goods	a.finished products sold to consumers for their own personal use
2.economic services	b. the next best alternative which is given up when a decision is made to use limited resources in a particular way
3.capital goods	c. intangible things that have value but often cannot be seen, touched or shown to others
4.productive resources	d. things of value that you can see, and which can be shown to the others
5.natural resources	e. the basic resources which are needed for the production of economic goods and services
6.consumer goods	f. human-made resources that are used for the production of other goods and services
7.opportunity cost	g. things provided by nature

 

READING III

As you read the text, focus on the concept of "economic system" and its various types.

ECONOMIC SYSTEMS

Allocating resources efficiently is complicated because there is almost always a very thorny tradeoff between what is efficient and what is "fair." People and societies organize economic life to deal with the basic problems raised by scarcity and opportunity cost through economic systems. An economic system can be described as the collection of institutions, laws, activities, controlling values, human incentives that collectively provide a framework for economic decision-making. An economic system works via the interaction of three invis­ible forces: the invisible hand (economic forces), invisible foot (political forces) and invisible handshake (social forces).

There are three basic economic questions that every nation must consider. They are (1) What goods and services shall be produced? (2) How shall they be produced? and (3) For whom shall they be produced?

Any economic system must use one or more decision-making methods or rules. Though the list of ways to make decisions is long, economic systems are classified into four broad categories. These are traditional, command, market, and mixed economies. Each of these systems works well to some degree at different points in time and for different cultures, but some are often better for answering one of the basic economic questions, while other systems may answer other questions more successfully.

Traditional economy is an economic system using social customs to answer the basic economic questions. Nowadays traditional economies are found primarily in the rural, non-industrial areas of the world, tribes in African countries, for example. In such areas, there is no national economy. Instead, there are many small segmented economies, each centered around a family or tribal unit. Each unit produces most of its own goods and consumes what it produces. The basic economic questions of "what", "how", and "for whom" are answered directly by the people involved, and the answers are usually based on tradition.

In command or planned economies the basic economic questions are answered by government officials. Command economies are characterized by government ownership of the economy's natural resources and capital goods. Government leaders decide what goods and services will be produced, how they will be produced, and how they will be distributed. Individuals have little control or influence over the way the basic economic questions are answered. There arevery few command economies left in the world, and North Korea is one of the examples. A planned economy is simple to understand but not simple to operate. It does, however, have a number of advantages:

- everyone in society receives enough goods and services toenjoy a basic standard of living;

- nationsdo not waste resources duplicating production;

- thestate canuse its control of the economy to divert resources to wherever it wants. As a result, it can ensure that everyone receives a good education, proper health care or thattransport is available.

Several disadvantages also exist. It is these disadvantages that have led to many nations abandoning planned economies over recent years:

-there is no incentive for individuals to work hard in planned economies;

- any profits that are made are paid to the government;

- citizens cannot start their own businesses and so new ideas rarely come forward;

- asa result, industries in planned economies can be very inefficient.

A major problem faced by command or planned economies is that of deciding what to produce. Command economies tend to be slow when responding to changes in people's tastes and fashions. Planners are likely to underproduce some items as they cannot predict changes in demand. Equally, some products, which consumers regard as obsolete and unattractive, may be overproduced.

A market economy or free economy is the opposite of a command economy. In a market economy basic economic questions are answered by individuals, households and businesses through a system of freely operating markets. Natural resources and capital goods are usually privately owned. In such economies buyers and sellers have a great deal of economic freedom, and they send signals to one another as they interact through the system. For example, by purchasing more of an item than usual, buyers send a signal to producers to increase production of that item. Similarly, by reducing their purchases of an item, buyers signal producers to reduce production of that item. In a true market economy the government plays no role in management of the economy, the government does not intervene in it. The system is based on private enterprise with private ownership of the means of production and private supplies of capital, which can be defined as surplus income available for investment in new business activities. Workers are paid wages by employers according to how skilled they are and how many firms wish to employ them. They spend their wages on the products and services they need. Consumers are willing to spend more on products and services, which are favoured. Firms producing these goods will make more profits and this will persuade more firms to produce these particular goods rather than less favoured ones.

Thus, we can see that in a market economy consumers decide what is to be produced. Consumers will be willing to pay high prices for products they particularly desire. Firms, which are privately owned, see the opportunity of increased profits and produce the new fashionable and favoured products.

Such a system is, at first view, very attractive. The economy adjusts automatically to meet changing demands. No planners have to be employed, which allows more resources to be available for production. Firms tend to be highly competitive in such an environment. New advanced products and low prices are good ways to increase sales and profits. Since all firms are privately owned they try to make the largest profits possible. In a free market individual people are free to pursue their own interests. They can become millionaires, for example.

Not surprisingly there are also problems. Some goods would be underpurchased if the government did not provide free or subsidized supplies. Examples of this type of good and service are health and education. There are other goods and services, such as defence and policing, that are impossible to supply individually in response to consumer spending. Once defence or a police force is supplied to a country, then everyone in this country benefits.

A cornerstone of the market system is that production alters swiftly to meet changing demands. These changes can, however, have serious consequences.

Imagine a firm, which switches from labour-intensive production to the one where new technology is employed in the factory. The resulting unemployment could lead to many social as well as economic problems.

In a market economy there might be minimal control on working conditions and safety standards concerning products and services. It is necessary to have large-scale government intervention to pass laws to protect consumers and workers.

Some firms produce goods and then advertise heavily to gain sufficient sales. Besides wasting resources on advertising, firms may also duplicate one another's services. Rival firms, providing rail services, for example, could mean that two or more systems of rail are laid.

Finally, firms have to have confidence in future sale if they are to produce new goods and services. At certain times they tend to lack confidence and cut back on production and the development of new ideas. This decision, when taken by many firms, can lead to a recession. A recession means less spending, fewer jobs and a decline in the prosperity of the nation.

There are no real economies in the world that rely solely on freely operating markets or on government decisions to answer the basic economic questions. All major economies are mixed economies. A mixed economy contains elements of both market and planned economies.Some countries are nearer to command economies, while others are closer to free market economies.

The aim of mixed economies is to avoid the disadvantages of both systems while enjoying the benefits that they both offer. So, in a mixed economy the government and the private sector interact in solving economic problems. The state controls the share of the output through taxation and transfer payments and intervenes to supply essential items such as health, education and defence, while private firms produce cars, furniture, electrical items and similar, less essential products.

 

1.Say whether the following characteristics of economic systems are typical for a)traditional economic systems, b) command economic systems, c)market economic systems.

1. Not a national economy.

2. Not government itself holds a monopoly.

3. Resources are distributed evenly, creating less socio-economic inequality.

4. “Invisible hand” is responsible for the production of goods and services, and their pricing.

5. Prices and supply of goods are controlled by the government.

6. Consumers enjoy the privilege of choosing among competitive products and services.

7. No opportunities for personal profit motives for any producer or consumer.

8. Individuals do not benefit from innovation or product development.