UNIT FIVE

The Basic Economic Problem Types of Economic Systems

ESSENTIAL VOCABULARY

1. Allocation n. – the act of allocating something – розміщення, розподіл. Allocation of labour – розподіл робочої сили, resource(s) allocation розподіл/розміщення ресурсів. Syn. distribution.

2. At one’s disposal – available for someone to use - в розпорядженні. Syn. available.

3. Benefit v. – to be advantageous or helpful to somebody or something; to do good to somebody or something – приносити/отримувати/мати користь/вигоду, допомагати. To benefit a society – приносити користь суспільству, a society benefits - суспільство отримує користь.

4. Combination n. – two ore more different things that exist together or are used or put together – комбінація, поєднання. Factor combination – поєднання факторів, combination of operations – поєднання операцій. Syn. a blend.

5. Consumer n. – anyone who uses goods and/or services – споживач, клієнт. Consumer behaviour – поведінка споживача, consumer choice - вибір споживача/споживчий вибір, consumer goods/commodities – споживчі товари, final/ultimate consumer/customer – кінцевий споживач. Syn. a customer.

6. Distribute v. – to share things among a group of people – розподіляти, розташовувати. Syn. to allocate.

7. Distribution n. – the act of distributing something – розподіл. Distribution of wealth – розподіл (національного) доходу/ багатства, income distribution – розподіл доходу.

9. Encourage v. - to give support, confirmation, or approval to process or action and to rouse a person to greater effort or interest - заохочувати, підтримувати, сприяти, спонукати, стимулювати, надихати. Syn. to favour, to stimulate.

11. Incentive n. – something that serves as a stimulus to action by appealing to self-interest – спонукальний мотив, стимул, заохочення. Incentive to use one’s property – стимул використовувати чиюсь власність. Syn. an encouragement, a motive.

12. Institution n. – a large organization that has a particular kind of work or purpose – установа, організація. Government institution - урядова організація. Syn. an organization.

13. Lack n. – a state of not having something or enough of something - брак, нестача, відсутність. Lack of competition – відсутність конкуренції. Syn. shortage.

14. Ownership n. - a right to hold a thing entirely as one’s own – право власності, власність. Ownership of the means of production – власність на засоби виробництва, private ownership – приватна власність, public/state ownership – усуспільнена/державна власність.

15. Perform v. – to do something difficult or useful – виконувати, здійснювати, робити. To perform an obligation – виконувати зобов’язання, to perform a task – виконувати завдання, to perform a work – виконувати роботу.

16. Property n. – something that is owned or possessed – власність, майно. Individual/personal property - особиста власність, private property - приватна власність, public property - державна/громадська власність. Syn. possessions.

17. Willing adj. – ready to do something without hesitation – готовий. To be willing to do something – бути готовим, робити щось охоче. Syn. ready.

Text

Whenever people gather in a community, they necessarily deal with a few universal economic problems. These fundamental questions are as crucial today as they were at the dawn of human civilization. Every human society - whether it is an advanced industrial nation, a centrally planned economy, or an isolated tribal society – must face and solve three fundamental and interdependent economic questions.

• What goods and services are to be produced, and in what quantities are they to be produced?

• How are these goods and services to be produced?

• Who will receive and consume these goods and services?

The first basic choice is that of what goods a society should produce and in what quantities.

Every economy has limited resources at its disposal but the goods and services wanted by its people are numerous. With the limited resources it can't produce all that is wanted by its people. So an economy faces the problem of what goods and services are to be produced and in what quantities. In other words it faces the problem of resources allocation between their alternative uses.

Should resources be allocated to the production of consumer goods or capital goods; whether to produce civilian goods or goods for defense; whether to construct luxury hotels or houses, all these are problems of choice.

In fact the choice to be made refers to what goods are to be produced and the second choice associated with it relates to the quantities of these goods. In other words what combination of goods and services should be produced? The nature of the combination of goods and services to be produced depends on the consumer choices and the consumer’s preferences* reflected in market prices or on the priority laid down in government policies.

How Are Those Goods and Services to be produced?

A second basic choice is that of how to produce. Most goods can be produced in more than one way by using resources in different quantities and combinations. It is often possible to vary the factor combination in manufacturing. Any society decides how it will organize its scarce resources in order to use them efficiently. Efficiency is a key criterion deciding how to produce. Efficiency means producing goods and services with a minimum of expense, effort, and waste. As the economy has to economize its limited resources it has to make a choice between various production methods to produce different goods.

Who Will Get to Use the Goods and Services Produced by the Economy?

No one can get all he wants. Whatever is produced in an economy it cannot be sufficient to meet everybody's wants. So a problem arises who will get and how much. This is the problem of distribution of wealth produced in an economy among different groups.

In fact, what determines who is to receive a particular share of the economic pie?

Production of goods and services is the result of the joint efforts of the owners of the four factors of production: land, labour, capital and entrepreneurship. So the total production is to be distributed among the owners of these factors of production. There is no system by which goods and services may directly be distributed among the factor owners. What they get is the money income in the form of rent, wages, interest and profits. With this income they buy the goods and services. How much can wage earners buy or land owners buy or owners of capital buy or profit earners buy? It will depend upon their income. So it is a problem of national income distribution.

The way that a country uses to solve three basic questions is based on its economic system.

An economic system is a mechanism that deals with the production, distribution and consumption of goods and services in a particular society.

The economic system consists of people, institutions and their relationships to resources. It addresses the problems* of economics, like the allocation and scarcity of resources.

There are four main types of economic systems present in the world: the traditional economy, the command economy, the market economy, and the mixed economy.

• The traditional economy is an economic system in which decisions about what, how, and for whom questions are made on the basis of customs, beliefs, religion, habit, and tradition.

People’s economic roles are the same as those of their parents and grandparents. The ways they produce clothing and shelter are almost exactly the same as those used in the past. Traditions decide what these people work for a living, how their work is performed and who gets what is produced in such an economy. Since there is little produced, there is little to go around.

It has an advantage over other systems, in that there is little disagreement among members because relatively little is disputed. However, it restricts individual initiative and has a lack of advanced goods, new technology, and economic growth.

• The command economy is a society where the government institutions make all decisions concerning what will be produced, how it will be produced, and for whom it will be produced.

In a command economy, a central authority or agency draws up plans that establish what will be produced and when, sets production goals, and makes rules for distribution.

The government owns a considerable fraction of the means of production that is, they are publicly owned; it also owns and directs the operations of enterprises in most industries; it is the employer of most workers and tells them how to perform their work.

The individual has very little say* as to how the basic economic questions are answered.

Command economies don't help* their workers' incentives because everyone is given the same amount of goods and the same standard of living. A hard working citizen would not be given a chance to benefit from his extra work because he cannot increase his standard of living any greater than it currently is and he will earn just as much as a person who makes little or no effort.

• The market economy (or so called free market economy or free enterprise economy) is an economic system in which the decisions of many individual buyers and sellers interact to determine the answers to the questions of What, How and Who.

In a market economy the fundamental economic questions are answered in the marketplace by the interaction of buyers and sellers. For example, the question of what to produce may be based on what trend is popular right now. The producers can create a product that they think they will sell well to the consumers in hope to make a profit. The question of how to produce is usually based on the producer's choice. They might decide to produce a product with more workers or they might decide to produce it more with machines and computers to save on labour costs*. The question involving for whom to produce is based on the consumers who decide what they want or need and what price they are willing to pay for it.

There are several essential elements in a market economy. One of these is private property - the right of individuals and businesses to own the means of production. In a free market economy, the major factors of production are privately owned. Private ownership gives people the incentive to use their property to produce things they will sell and make profits.

This desire to earn profits or the profit motive is a second ingredient in a market economy.

The profit motive encourages sellers to produce at the lowest possible cost.

• The mixed economy is an economic system that answers the three economic questions both in the marketplace and in the government*.

A mixed economy contains both private and public, or state-owned (or controlled) enterprises and relies on the market but with a large dose of government intervention. A mixed economy usually involves producers working closer with the government to achieve economic goals. interference

Since no country in the world exemplifies either type of economic system in its pure form, all major economies are mixed ones because market forces as well as government decisions* play a role in answering the basic economic questions. The blend of market and government participation is different in different countries with mixed economies. The optimal level of government interference remains a problem which is of interest to economists.