2020-06-29
336
The production possibility curve is a useful tool used to illustrate en economic problem of scarcity in the choice as we as a society must make.
Let’s look at the hypothetical choice between, say, the production of food and the production of guns.
On the vertical axis we measure the production of food. On the horizontal axis – the production of guns. If we use all our resources in the production of food, we as a society will be able to produce a quantity 0A, and this is indicated as point A. We’ll assume that this quantity is about 600 tons of food. Note that at this point we produce no guns at all. But as we use all our resources for the production of guns we’ll be able to produce a quantity 0B. This is indicated as point B/ Let’s assume it’s equal to, say, 6 million guns. Once again note that at this point the production of food is zero because we’ll be using all our resources producing guns.
We can however devote some of our resources to the production of food and some to the production of guns. This might be put as point C. At this point the production of food will be, say, 550 tons and a number of guns produced, say, 2 million.
Now at this point the production of food is 350 tons and the production of guns is 4 million. And as point E indicates it’s also possible for us to produce a combination of 250 tons of food and 5 million guns. Well, there’re many possible combinations and if we draw a line through them we get to a production possibility curve. This curve indicates the boundaries or limits of what we can produce given our resources and productivity.
In other words, in this economy production can never be more than various amounts indicated in a production possibility curve.
Unit 3: Types of Economic Systems
Nearly every society in the world faces the same fundamental problem: how to distribute limited resources to people in a way that will be fair and effective. This is what is called scarcity, and different societies approach this problem in different ways.
There are four essential types of economic systems. The traditional economy is based on culture and rituals, and is focused on the community as a whole. Everyone pitches in and benefits from everyone else’s effort. Small societies focused on subsistence farming and hunting are considered traditional economies. An example would be a traditional Inuit village in North America.
The command economy relies on the government to make all economic decisions including allocating and distributing resources and regulating prices and wages. Among the examples of command economy would be North Korea.
The market economy is driven by consumers whose decisions determine how the industries and financial markets will operate. Individuals choose how resources are used, what goods to make, what services to provide and what jobs to take. In a pure market economy there is no government involvement. Because of this there are no true market economies.
Most societies today have mixed economy which utilizes limited government involvement while also applying free market concepts. One example would be the United States. However nearly all other countries are some form of mixed economy as well. Each is unique and faces a challenge of finding a proper balance between consumer choices and government control.
REVIEW: Four types of economic systems
1. TRADITIONAL: Based on culture and rituals
2. COMMAND: Relies on the government to make all economic decisions
3. Market: Consumer choices determine how industries and financial markets operate
4. MIXED: Limited government involvement while also applying free market concepts.
