Questions and Answers
Explain how various economic systems allocate goods and services.
Command economy: goods and services are controlled by government. Market economy: controlled by consumer's demands. Traditional economy: controlled by traditions and taught production.
What are the three basic economic questions that any society must answer?
What goods and services will be produced and in what quantities? How will they be produced? For whom will they be produced?
Describe how economic systems are classified into three main types based on how they answer basic economic questions.
Command economy: a central planning authority makes all decisions. Traditional economy: production is based on customs and teachings. Mixed economy: basic decisions are made by the market with some government intervention.
If Company A produces 20 shirts or 2 comforters in a month and Company B produces 40 shirts or 10 comforters in a month, which company has the absolute advantage in the production of shirts?
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Which company has the comparative advantage in the production of comforters?
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Which company should specialize in producing shirts?
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Use the theory of comparative advantage to analyze the benefits of specialization and trade.
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Use the circular flow diagram to show the relationships between firms, households, and markets.
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Identify the four resources (factors of production) and the income paid to each resource for its role in producing goods and services.
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Study Notes
Economic Systems and Allocation
- Command economy: Government controls production and distribution of goods and services.
- Market economy: Consumers dictate production through their demands.
- Traditional economy: Production methods based on cultural customs and practices.
Basic Economic Questions
- What goods and services will be produced and in what quantities?
- What methods of production will be utilized?
- Who will benefit from the produced goods and services?
Classification of Economic Systems
- Command economy: Central authority makes all production decisions, with legally binding orders for individual producers.
- Traditional economy: Production is based on ancestral teaching and customs, typically lacking sophistication.
- Mixed economy: Market primarily determines decisions, but government intervenes when necessary to correct market failures.
Absolute and Comparative Advantage
- Company comparisons: Given the same resources, Company A can produce either 20 shirts or 2 comforters, whereas Company B can produce 40 shirts or 10 comforters.
- Company B has the absolute advantage in shirt production, producing 40 shirts monthly compared to Company A's 20.
- Company B also holds the comparative advantage in comforter production due to its ability to produce 10 compared to Company A's 2.
Specialization Insights
- Specialization occurs when each company focuses on the production of goods for which they have a comparative advantage, maximizing efficiency and output.
Comparative Advantage in Trade
- The principle of comparative advantage indicates that both trading partners benefit when they specialize in products that have lower opportunity costs and trade for others' more efficiently produced goods.
Circular Flow Diagram
- Households purchase goods/services from firms, creating a monetary flow to the firms.
- The market where this exchange occurs is termed the product market.
- Firms acquire resources from households, leading to opposite flow of dollar payments such as wages and profits.
- This interaction results in a total framework of individual markets facilitating the exchange process.
Factors of Production and Their Income
- Land: Includes natural resources; generates income known as rent.
- Labor: Encompasses human physical and mental effort.
- Capital: Human-made aids for production like tools and factories.
- Entrepreneurship: Involves combining resources innovatively to produce goods/services, also associated with risk-taking.
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Description
Test your understanding of different economic systems with these flashcards. This module covers how goods and services are allocated across various types of economies and explores the essential economic questions every society must address. Perfect for students looking to sharpen their knowledge in economics.
