Economic Systems and Production Possibilities Frontier
The Economics of Possibilities
Production:
A) Technology: It is the method of combining various factors to produce available goods and services.
The Production Possibilities Frontier (PPF)
The Production Possibilities Frontier reflects the highest quantities of goods and services that a society can produce in a specific period of time, based on specific production factors and technological knowledge.
- Unreachable points: Combinations situated above the border are unreachable or not feasible.
- Inefficient points: Combinations situated below the border represent inefficient resource use.
Economic Growth and Productivity
Economic Growth: This is the increase in the production of goods and services within a society over a given time period. For an economy to grow, it must:
- Increase the factors of production: Utilizing more capital, more workers, and more resources.
- Improve productivity: Using the same means to produce a higher number of units.
Productivity: The relationship between the resources used in production and the total amount of goods and services produced.
Understanding Economic Systems
An economic system is the way a society organizes itself to meet needs with scarce resources, while establishing formulas for the distribution of the population.
Market Economy
- What to produce? Companies produce goods that household demand deems profitable.
- How to produce? Companies select production factors while the public sector seeks to regulate and monitor production processes.
- Who should produce? Production is for those who can pay the price of the goods and services concerned.
Centralized Economy
- Forecast errors: Planners often lack reliable information on the progress of the economy, which leads to incorrect forecasts and poor resource allocations.
- Missing incentives: Because the state fixes prices and the wages of workers, individual motivation is often lacking.
- Excessive bureaucracy: A massive administrative apparatus is required for total control.
Mixed Economy
In a mixed economic system, the state establishes a juridical-institutional framework. Key functions include:
- Legal Framework: Without basic rules and regulations, it is not possible for families and businesses to develop their activities without harming others.
- Providing public goods: The state provides health services, welfare, and public education that would otherwise be prohibitively expensive.
- Redistributing income: The public sector tries to bridge socioeconomic differences.
- Smoothing cyclical instability: Managing the different phases of economic expansion and recession.