Economic Systems

1. Factors of Production

The factors of production are merely the resources necessary to produce output. The factors of production are split in the following ways:

• Physical resources: These are the tangible items that go into the production of whatever it is the business is making.
• Human resources: These refer to the labor involved in making, distributing, and selling a particular product or service.
• Capital: This refers to the funds that the business uses to operate and grow or expand.
• Entrepreneurs: These are a special type of human resource. They are folks who help to expand and grow the business in creative ways. You could think of them as innovators if you like.
• Information resources: These are intangible, like the patents and ideas that the company has and owns, which make it what it is.

term to know

Factors of Production

The resources necessary to produce output.

2. Economy Systems

Economy systems are how a society chooses to distribute goods, services, and resources. We’re going to discuss two broad categories of economy systems:

• Planned economy
• Market economy

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Economy Systems

How a society chooses to distribute goods, services, and resources.

2a. Planned Economy

A planned economy is one in which a central authority controls and chooses how to distribute resources for the production of goods and services.

There are two major types of planned economies: communism and socialism.

Under communism, the government owns all businesses. It is the ultimate arbiter of how resources are distributed and how much is produced. It was introduced by a man named Karl Marx.

EXAMPLE

In the modern world, we see communism active in places like North Korea and Cuba.

Under socialism, the government owns select businesses or pieces of the economy. This system is found predominately throughout Europe.

EXAMPLE

Under the National Health System in the United Kingdom, the government decides how health care is distributed among the populace.

EXAMPLE

Air France and Air India are the flag-carrying airlines for their particular countries. In these cases, the government decides how the airline is run, how many flights they have, and what routes they’re going to fly.

term to know

Planned Economy

A central authority controls and chooses how to distribute resources for the production of goods and services.

2b. Market Economy

The next type of economy we’re going to look at is the market economy. This is where supply and demand dictate how to distribute resources for the production of goods and services. You might have heard of this type of economy being referred to as capitalism.

In this market economy, private owners are responsible for and focused on the development of wealth. These private owners and their consumers get to drive how the market works. They control what’s produced based on the supply from the producers and the demand from the consumers.

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Market Economy

Supply and demand dictate how to distribute resources for the production of goods and services.

2c. Mixed Market Economy

The United States is a mixed market economy, which is a combination of a planned economy and a market economy. Now, the United States operates differently from other countries around the world. It’s more laissez-faire than places like China or France.

did you know

Laissez-faire capitalism was an idea that was introduced by a man named Adam Smith in his book The Wealth of Nations.

Now, an interesting thing about markets around the world currently is the privatization of state-owned businesses in places like Sweden, France, or India, like the Air India and Air France example from earlier. What you see now is an increased tendency to divest those businesses from the government and put them into private hands.

EXAMPLE

Lufthansa Airlines from Germany was completely state owned up until 1994, at which point the government divested itself of the airline. It is now run as a private company.

term to know

Mixed Market Economy

A combination of a planned economy and a market economy.