The Four Functions Of An Economic System

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Four functions of the economic system

The four functions of an economic system are what to produce, how much to produce, how to produce and for whom to distribute to. An economy can either be free market or planned, both of which seek to satisfy maximum wants with minimum resources.

Market
Planned
What to produce
Consumer Sovereignty
Government
How much to produce
Consumer Demand
Government
How to produce
Firms
Government
For whom to distribute
Dedicate more resources to higher income earners
Government

Great table Adam - a little more detail - define consumer sovereignty, what is the relationship between resources and income, what is the theory behind government ownership of resources in planned economies?
Market Economies

Includes
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It is no use for producers to sell products that nobody is interested in paying for, because they won’t make any money.
How much to produce is determined by consumer demand. If a product is in high demand producers will satisfy it if it provides a decent return.
Producers will seek to gain the maximum profit for the lowest possible cost. Therefore producers will seek out the most cost efficient means for production of there good or service.
For whom to distribute is based on who is willing to pay for a particular item. Producers will dedicate more resources to higher income earners because they will buy their products. For instance, higher income earners are more likely to pay for luxury products because they have a large amount of disposable income to spend on them. This means firms will make products for the higher income earners in hopes to turn a profit.

Planned
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These include environmental laws stopping businesses from dumping waste cheaply, Labour laws which implement safe working conditions and decent pay for workers, and laws holding businesses to ethical practices. For example the export of live cattle to indonesia from Australia was temporarily banned because live cattle in Australia must be stunned before they are slaughtered. This is not the case in indonesia. Growth is also limited by technology. Current levels of technology can only produce a certain amount products to sell. If technology doesn’t improve a limit on growth will be reached.
Another factor affecting Australia is the amount of natural resources available. The mining boom relies solely upon the amount of minerals in the ground. As these resources diminish economic growth will slow and eventually stop. Indonesia’s growth will also be limited by the Geography of the country - lots of islands spread out over a large area,, a large relatively poor, uneducated population. Levels of civil unrest - Aceh will also limit their capacity to

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