21. What factors of production are active (flexible) and passive (fixed)? Why?

THE BASIC ECONOMIC PROBLEM

TYPES OF ECONOMIC SYSTEMS

1.What are the three basic economic questions that every society must answer?

Every human society – whether it is an advanced industrial nation, a centrally planned economy, or an isolated tribal society – must solve three fundamental and interdependent economic questions:

•What goods and services are to be produced, and in what quantities are they to be produced?

•How are these goods and services to be produced?

•Who will receive and consume these goods and services?

2.What makes each society look for the answers to the basic economic questions?

3/ How does each society make its decisions to solve the problem of scarcity?

Every economy has limited resources at its disposal but the goods and services wanted by its people are numerous. So an economy faces the problem what combination of goods and services should be produced to satisfy individuals’ unlimited wants. The nature of the combination depends on the consumers’ choices and preferences reflected in market prices or in government policies.

4/What does the What question refer to? The first basic choice refers to what goods a society should produce and in what quantities. Every economy has limited resources at its disposal but the goods and services wanted by its people are numerous. So an economy faces the problem what combination of goods and services should be produced to satisfy individuals’ unlimited wants. The nature of the combination depends on the consumers’ choices and preferences reflected in market prices or in government policies.

5/What are the ways of providing answer to the How question? A second basic choice relates to how to produce goods and services. Most goods can be produced in more than one way by using resources in different quantities and combinations. Any society decides how it will organize its scarce resources in order to use them efficiently. As the economy has to economize its limited resources it has to make a choice between various production methods to produce different goods.

6/What does the Who question mean?

The next problem is who will get and how much. Production of goods and services is the result of the joint efforts of the owners of the four factors of production, that is, land, labour, capital and entrepreneurship. So the total national income is distributed among these factor owners. They get money income in the form of rent, wages, interest and profits. With this income they buy desired goods and services. This is the problem of distribution of a nation’s wealth among different groups.

7/What is an economic system?

The way that a country uses to solve three basic questions is based on its economic system. An economic system is a mechanism that deals with the production, distribution and consumption of goods and services in a particular society.

8.What categories do economic systems fall into? There are four main types of economic systems present in the world: the traditional economy, the command economy, the market economy, and the mixed economy.