What are the four functions of an economic system? Contrast the way in which market economies and mixed economies attempt to solve the economic problem. Use relevant statistics and specific examples to illustrate your answer.
The economic problem arises because of the scarcity of resources in relation to unlimited wants. A market economy such as Greece is an economy in which decisions are decided entirely by market forces such as supply and demand. In comparison, a mixed economy such as Australia is a combination of free enterprise and government control. Market and mixed economies will use different methods to attempt to solve the economic problem in terms of decision-making, resource allocation and distribution of final output. The four functions of an economic system that they will both answer to are: what to produce, how much to produce, how to produce and how to distribute production.
In a market economy, what to produce and how much to produce are solely determined by the operation of price mechanism where consumer preferences and sovereignty establishes the pattern of production and how much output is being produced. Producers will respond by increasing the production to meet demand and therefore more consumer wants will be satisfied and scarce resources are allocated more efficiently. This is one way of the market economy attempting to solve the economic problem. However, producers will only maximise profits by producing those goods and services that consumers are willing and able to purchase. Because of this, personal wants are being satisfied but collective wants are not. This is evident in Greece, where the life expectancy is 79.9 years in 2012 compared to Australia’s life expectancy of 81.9 years in 2012 suggesting that they have a lower quality of life as collective goods and services such as health and welfare are not resourcefully provided.
In comparison, in a mixed economy decisions of what to produce and how much to produce are also...
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