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economic system what is an economy
people and firms use exchange and
consume goods and services in an economy
an economy can be of one size with any
number of people and firms involved for
example a village or small town will
have a small local economy but may be
part of a much larger regional or even
national economy for example Nairobi is
the capital city within the national
economy of Kenya in turn the Kenyan
economy is part of the African economy
along with all other African countries
similarly all African national economies
form part of the global economy some
economies have access to more resources
than others but all have far fewer
resources than they require to satisfy
all the needs and wants of their
populations all economies must therefore
choose which wants to fulfill in tower
with their available resources for
example an economy may choose to satisfy
all want for energy but will it do so by
generating electricity from coal-fired
power stations nuclear power plants or
from renewable sources such as solar
panels on wind turbines
every economy must therefore decide what
goods and services to produce how to
produce and for whom to produce
economists refer to this as the problem
of resource allocation that is every
economy must choose how and how much
land labor capital and enterprise to
assign to different productive uses the
three main economic systems all
economies have to answer three
fundamental economic questions these are
what to produce how to produce for whom
to produce what to produce one problem
facing people when there is scarcity is
deciding exactly what goods and services
to make this involves choosing which
wants to satisfy every society no matter
what its size is faced with the same
choice once it has been decided exactly
what goods and services to produce there
is the problem of deciding how to make
them how to produce what tools are
needed how many workers how much land is
needed in addition there are many
different ways of making things for
example when producing corn a lot of
machinery could be used to plow the land
plant seeds and eventually harvest the
crop with relatively few workers
alternatively a lot of workers could be
used to physically plow plant and
harvest with very little machinery for
whom to produce when the questions of
what to produce and how to produce have
been answered
a final problem remains because of
scarcity not every person's wants can be
satisfied so his wants to satisfy must
be determined in other words it must be
decided who gets the goods and services
that have been made some people are
stronger than others
while some people may work harder than
others perhaps they should obtain more
goods and services others
maybe we can be unable to work at all
should they get any goods and services
or should everybody receive an equal
share of all the goods and services
produced even if some people are in
greater need than others the question of
who should get the goods and services
must be answered by society as a whole
economists cannot tell us what is best
because the answer depends on people's
opinions that is it involves making a
value judgment
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