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Government makes economic decisions1/15/2024 ![]() ![]() Traditional Economic System:Ī traditional economy is rooted in long-standing cultural customs. Historically, there have been three basic types of economic system: traditional, command, and market. The system that a society chooses reflects the philosophical and political ideas on which that society is founded. The term economic system refers to the way in which a society organizes the production and distribution of good and services. More Detailed Informationįor every society the answers to the three basic questions depend on what kind of economic system it uses. Ever since this groundbreaking work was published in 1776, many competing economic theories have been presented, but all of them have been organized around the attempt to answer the three basic questions. Modern economic theory as we know it today is founded on the writings of the Scottish philosopher Adam Smith (1723–90), especially his best-known work, a five-book treatise called An Inquiry into the Nature and Causes of the Wealth of Nations. ), the questions were not articulated in their current form until economics was introduced as a discipline of study more than a thousand years later. While indirect attempts to answer these questions can be found in the writings of the ancient Greek philosophers Plato (c. ![]() Throughout history every society-whether society is defined as a nation, a tribe, or a single family-has had to determine what to produce, how, and for whom. Questions of scarcity and resource allocation are as old as human civilization. Because of the constraints of scarcity, then, decisions must be made about resource allocation (that is, how best to allocate, or distribute, resources for the maximum benefit of the society). No country can produce everything, no matter how rich its mines, how massive its forests, or how advanced its technology. Simply put, scarcity means that resources are limited. Scarcity refers to the essential fact that people’s wants or desires are always going to be greater than the resources available to fulfill those wants. Resources are all of the ingredients needed for production, including physical materials (such as land, coal, or timber), labor (workers), technology (not just computers but, in a broader sense, all the technical ability and knowledge that is necessary to produce a given commodity), and capital (the machinery and tools of production). The possibilities are endless.Īlthough every society answers the three basic economic questions differently, in doing so, each confronts the same fundamental problems: resource allocation and scarcity. Once they are made, the goods might be given out for free to the poor or sold at high prices that only the rich can afford. The goods might be produced by unskilled workers in privately owned factories or by technical experts in government-funded laboratories. In order to meet the needs of its people, every society must answer three basic economic questions:Ī society (or country) might decide to produce candy or cars, computers or combat boots. Three Economic Questions: What, How, For Whom? What It Means ![]()
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