Market Ecobomies

Economic systems provide needs for citizens by answering several questions:

• What resources does the country have, and what can be produced from them?

• How should goods and services be produced from the available resources?

• How are goods and services distributed among the inhabitants?

The resources of an economic system are called factors of production because the economy needs them to produce goods and services. They may be grouped into four categories:

• Land. This category includes all natural resources, such as soil, water, air, and minerals.

• Labor. Every economy needs human resources — people who produce goods and services.

• Capital. Capital includes money, factories, heavy machinery — anything used to produce products and goods.

• Management. Managers organize and direct the other three factors of production.

There are three types of economic systems, namely:

1. Centrally planned economy

2. Mixed economy

3. Market economy

I will discuss two which are:

1. The Market Economy

Pure market economies rarely exist but in theory, a market economy answers the three questions that form the economic problem through a market system. The market system is based on the demand and supply of products. Demand and supply determine prices and prices act as signals to both producers (suppliers) and consumers (who create demand).

The market system relies on a number of factors to ensure that it works efficiently.

• The profit motive - the incentive for a reward for enterprise

• Good levels of information being available to both producers and consumers

• Price accurately reflecting the costs and benefits of consumption and production

• The ease with which resources can move to different uses

At the heart of the market system is the profit motive. Entrepreneurs (those who organise resources into production) are stimulated to take risks and produce goods and services by the prospect of seeing some return on their efforts. The extent to which they...