Four Functions Of An Economy Essay
The four functions of an economy.
The four functions of an economy are what to produce, how much to produce, how to produce and whom to distribute to.
1. What to produce: This is essentially the decision of what an economy is going to produce with its resources. Sometimes an economy must choose to lose some goods in favour of producing more of something else. For example if an economy was at full employment and was producing an even number of both 50 cars and 50 boats but the economy needed to produce 10 more boats they would have to sacrifice 10 cars in order to do so. The thing that is lost in order to produce more of something else is called opportunity cost.
2. How much to produce: This is determined by consumer demand for a …show more content…
To whom to distribute: Distribution is the process of making a product or service available for use or consumption by a consumer or business user. Answering this question begins with income, the more income a person earns the larger their share of the economy. The size of a person’s income depends on the amount of resources that you own. Essentially firms decide who to distribute goods to based on their income and current resources.
The differences between a planned and market economy
The main difference between a planned and a market economy is that a market economy in basic terms lets consumers largely dictate the four economic functions where as in a planned economy the four economic functions are entirely regulated by the government. Market and Planned economies are defined as:
Market: Resources are allocated according to a system of markets. They allow property rights, profit motive, and freedom of enterprise.
Planned: Based on government ownership of most resources and the allocation of resources according to government planning priorities.
An example of a market economy is the United States. In the united states economy profit motive has allowed it to become one of the world’s largest national economies. It was only able to achieve this enormous growth due to freedom of