The Economic Problem

Modelling Economic Relationships

• The circular flow of income (cont.)
• macroeconomic issues
• the size of total flows
• microeconomic issues
• individual markets
• choices within goods and factor markets

Q Which one of the following does NOT represent a flow of income earned by factors of production?

• Wages earned by workers in a factory.
• Rent received by landowners.
• A machine sold by a firm.
• Profits earned by businesspeople.
• Salaries earned by lecturers.

Economic Systems

• Classifying economic systems
• methods of classification
• classification by degree of government control
• command economies
• free-market economies
• mixed economies
• other classifications
• the informal economy
• the not-for profit sector

Economic Systems

• The command economy
• features of a command economy
• planning
• consumption and investment
• matching of inputs and outputs
• distribution of output
• Advantages of a command economy
• high investment, high and stable growth
• social goals pursued
• low unemployment

Economic Systems

• Problems of a command economy
• problems of gathering information
• expensive to administer
• inefficient allocation of resources
• inappropriate incentives
• no system of prices
• shortages and surpluses
• lack of response to consumer demand

Economic Systems

• The free-market economy
• based on free decision making by individuals and firms
• demand and supply decisions
• the price mechanism
• shortages and surpluses
• shortage  price rises
• surplus  price falls
• equilibrium price
• where demand equals supply
• response to change in demand and supply