ECONOMIC SYSTEMS

 In some modern societies, government plays a big
role in answering the three basic questions. In pure
command economies, a central authority directly or
indirectly sets output targets, incomes, and prices.
 A laissez-faire economy is one in which individuals
independently pursue their own self-interest, without
any central direction or regulation, and ultimately
determine all basic economic outcomes.
 A market is an institution through which buyers and
sellers interact and engage in exchange. Some
markets involve simple face-to-face exchange; others
involve a complex series of transactions, often over
great distances or through electronic means. 6


There are no purely planned economies and no
pure laissez faire economies; all economies are
mixed.

 Individual enterprise, independent choice, and
relatively free markets exist in centrally planned
economies; and there is significant government
involvement in market economies.

 Free markets produce what people want, and
competition forces firms to adopt efficient
production techniques. The need for government
intervention arises because free markets are
characterized by inefficiencies and an unequal
distribution of income and experience regular
periods of inflation and unemployment.

 

FIRMS AND HOUSEHOLDS: THE BASIC
DECISION MAKING UNITS
 

Firm- An organization that transforms resources
(inputs) into products (outputs). Firms are the
primary producing units in a market economy.

 Entrepreneur A person who organizes, manages, and
assumes the risks of a firm, taking a new idea or a
new product and turning it into a successful business.

 Households- The consuming units in an economy.

 Product or output markets The markets in which
goods and services are exchanged.

 Input or factor markets- The markets in which the
resources used to produce goods and services are
exchanged.

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