What Are The Four Functions Of An Economic System

1942 Words Mar 12th, 2015 8 Pages
Economies: Their Similarities and Differences

Describe the four functions of an economic system.

The four functions of an economic system is what to produce, how much to produce, how to produce, and to whom to distribute. What to produce is determined merely by the idea of consumer sovereignty, where in a market working economy, resources are distributed to satisfy most wants. This question is answered by government policy in a planned economic system. How much to produce is determined by consumer demand, where if no one buys a certain product, production will come to a halt and a surplus will build up, though in the circumstances of a planned economy, the government makes the decisions and everyone has to buy it anyway. How to produce is determined by firms, where they combine resources to maximize production and profit at a minimal cost where labour here is frequently the most expensive part in the process. Firms also decide whether to choose labour or capital intensive methods depending on the comparative cost of either method. And lastly, to whom to distribute is determined by your income. Depending on the amount of resources you own and the scarcity of those resources, your income varies. In a planned economy, the rewards for effort that are determined by the government, yet they hardly ever relate to the possession of the resources. Well done - clearly identifying when you are talking about market economies would have been good to see.

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