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After studying this module, you should be able to


answer the following questions:


1. What are the answers to the fundamental economic questions in a command, market and mixed economies?


2. What are the main economic functions of the state (government) in a modern economy?


3. What instruments does government use to intervene in the economy?


‘Economy’ is not the same as ‘economics’


Economics is a social science. An economy is the system according to which the money, industry and trade of a country are organized and its wealth which it gets from business and industry.

The economic systemis a network of relations andorganizations that implements the following:

· sets the laws and regulations that govern the economic activity;


· determines the property rights and ownership of factors of production;


· distributes the decision-making power over production and consumption;


· determines the answers to the three fundamental questions. There is a great variety in the way countries organize their


economies. But one central theme dominates: Should the economy rely primarily upon the private market or upon government commands to answer the fundamental questions of what, how, and for whom to produce?


Economies fall into three major groups:


1. Command or planned economy


2. Free market economy


3. Mixed economy


In a command or planned economy direction is given by government bureaucracy that determines through a system of planning offices what goods are produced, how they are produced, and who gets the fruits of productive activity. Such planned economy existed in the Soviet Union and in the Soviet bloc countries.


A free market economy, or free enterprise, or laissez-faire(a French word for ‘let people do what they choose’) is the type when resources are allocated through markets, and governments do not intervene in economic decisions of production and consumption. Under the market system, firms buy factors of production and produce outputs, selecting inputs in order to maximize their profits.

Consumers supply factors of production and buy consumer goods to maximize their satisfactions.


The free-market economy is usually associated with a capitalist system, where land and capital are privately owned. Economic decisions are made by households and firms that are assumed to act in their own self-interest.


It is also assumed that individuals are free to make their own economic choices: consumers are free to decide what to buy with their incomes; workers are free to choose where and how much to work; firms are free to choose what to sell and what production methods to use. The resulting supply and demand decisions of firms and households are transmitted to each other through their effect on prices.


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