The Four Functions Of An Economy Essay

1016 Words Mar 11th, 2015 5 Pages
Part One
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 product. If no one wants to buy a product then a surplus will build and production of this product will stop. However if a lot of people want to buy the item then the item will be produced to avoid a shortage.
3. How to produce: This is decided by firms because they choose the particular resources to put together so that production is maximised and also so that they can turn the highest possible profit. Often the biggest decision made by firms is whether to use labour ntensive methods of production or use capital intensive methods to produce goods. This decision usually depends on the relative cost of each method.
4. To whom to distribute: Distribution is the process of making a product or service available for use or consumption by a…

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