The basic functions of economic Systems

The central problem of economics is to determine the most effective ways to allocate the factors of production (natural resources, human resources and capital) and solve the problem of scarcity created by society’s unlimited wants and limited resources. In doing so, economic systems must perform three main functions.

One function is to determine what is to be produced and in what quantity. Even a primitive economy must choose between food and shelter, weapons and tools. In modern economy the potential variety of goods and services that may be produced is immense.

The second function an economy must perform is to decide how the desired goods are to be produced. The efficient production of goods requires that certain rules must be followed: no resource should be used in producing one thing when it can be used in producing something more valuable; and each product should be made with the smallest possible amount of resources.

The third function of an economy is to determine who gets the product. One family gets $5,000 worth of goods this year, another family five times as much – how is the division to be decided? The incomes of individuals are determined by the quantities of resources they own (labour skills, capital in all its forms) and the prices they receive for the use of these resources.

Notes

to allocate – размещать to require – требовать

shelter – кров $5,000 worth of goods – товары на сумму $5,000

immense – огромный