An economic system is the result of individuals (consumers and producers), groups (firms, trade unions, political parties, families etc) and the government coming together and interacting in a legal and social society. The function of an economic system is to resolve the basic economic problem - scarcity which means that the resources are limited but wants are infinite. This distribution has three dimensions:
* What is to be produced
* How is it to be produced
* For whom is it to be produced.
There are 2 economic systems which are commonly used world-wide. There are: the free market system in which the role for the government is limited and the planned system where the government takes viturally total control. In both of these systmes there are different methods of resource allocation used. There are economies that use a mixture of these systems in particular the planned and free market system also known as the mixed economy in which some of the decisions resource allocation are done by the government and other by the public.
In a free market economy:
*The factors of production are owned by private individuals or groups of individuals who own the resources. They then rent them out to the firms so that they can produce the goods and services.
*Everyone is motivated by pure self interest. Consumers maximise welfare, firms maximise profits and privated individuals aim to maximise rents, wages interest and profit.
*Firms can sell anything they want. They respond to the consumers who are allowed to by anything that is sold by the producers.
*The level of competition is very high. Firms are competing desperately for customers and the consumers are competing with each other for the goods on offer
How are resources allocated under a market mechanism?
What is to be produced?...