The Operation of an Economy

• Market/free enterprise economy


  Based on a system of markets that allocate resources and allow private property rights and freedom of enterprise
• Planned economy


  Based on government ownership of most resources and the allocation of these resources according to government planning priorities
• Market economies


  • Do not attempt to distribute output equally within society
  • Provide people with income as a reward for their contribution to the production process
  • The higher the contribution, the higher the level of individual income
• The problem with this system of distribution is that it can be unfair, particularly for people who are unable to contribute to production because of illness, age or disability
• Pricing Systems


  In market economies, once you have bought something, the ownership of the good transfers from the seller to the consumer
• Systems Without Prices


  Goods and services are able to be distributed and exchanged without the use of money (barter)
• Factors of production


  Land, labour, capital and enterprise
• Provision of Income


  1. Goods and services are produced by using a combination of resources

  2. Factor incomes paid to the owners of the factors of production are determined by the quality and quantity of resources that are used in production
• Productivity


  The economic measure of output per unit of input. Input includes labour and capital while output is measured as either revenue from sales or manufactured stock.
• Production


  The process of combining various FoP to make a good or service.
• Quality of life


  Depends on the quality and quantity of material and non-material goods and services in the economy and community
• Final income


  Gross income - tax - social wage - indirect taxes
• Injections


  Money coming into the economy
• Leakages


  Money going out of the economy
• When leakages and injections are equal


  The economy is in equilibrium
• Disequilibrium


  • Contracting: leakages > injections
  • Expanding: leakages < injections
• What are the leakages in the circular flow of economy?


  Savings, taxation and imports
• What are the injections in the circular flow of the economy?

  Investments, government spending, exports
• Equilibrium

  When there is no tendency for levels of income, expenditure and output to change
• Circular Flow of Income

  The economy is a continuous cycle, operating on the inter-relationships of various economic sectors. These sectors are dependent on each other to maintain operations on an economy.

  • Household
  • Finance
  • Government
  • Overseas
• What to Produce?

  An economic system responds to society's scale of preferences for certain goods or services over others. If resources are allocated efficiently, consumer wants and needs are satisfied and producers maximise profits.
• How much to produce?

  Quantities of goods or services to be produced depending on the level and pattern of consumer demand and availability of resources
• How to produce?

  The method of production to be used, depending on state of technological progress and resource availability