1.2 Resource Allocation and Economic Systems
Economic systems answer what, how, and for whom to produce: market economies rely on prices and property rights, command economies on central planning.
Because resources are scarce, every society must answer three questions: what to produce, how to produce it, and who gets it. The answers define the economic system.
In a market economy, decentralized buyers and sellers answer those questions through prices — Adam Smith's 'invisible hand' — supported by private property rights and self-interest. In a command economy, a central authority owns resources and plans production. Real economies are mixed: mostly market-driven with government providing public goods, rules, and some redistribution.
For the exam, connect the system to incentives: prices in a market economy signal scarcity and coordinate millions of decisions without any planner. That is why shortages and surpluses tend to be temporary when prices are free to adjust, and persistent when they are not.
Key terms for 1.2
Labeling the United States a pure market economy. Every real economy is mixed — the U.S. has substantial government spending, regulation, and transfer programs alongside markets.
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