How does the Economic System Works?
Every economic system consists of consumers and producers. Individuals, firms and governments are considered as consumers. There are three basic economic questions that determine how the particular economic system works. The questions are;
i) What to produce?
ii) How to produce?
iii) For whom to produce?
All of these questions are answered due to the type of economic system in the particular country. There are three main types of economic systems in the world, which are capitalist economy system, socialist economy system and mixed economy system.
In capitalist economy system, producers will produce goods and services due to the market’s demand and try to maximize their profit. In the other word, consumers determine “what to produce”. Consumers will pay producers according to what have they buy from the market. At the same time, producers acquire resources from consumers including land, labor, capital and management to produce goods and services. Between these two operations among consumers and producers, they will use financial distribution system like bank to make payment. As opposed to socialist economy system, governments determine all of the economic activities. Everyone is given the same standard of living and they have no chance to improve it although they work harder than the others. “How to produce” is depend to the producers either to use labor intensive or capital intensive (technology-based). Moreover, “for whom to produce” is depend on consumers to buy what they need and their willingness to pay the price of goods and services.
Measures to Combat Inflation
Inflation is a situation where price level is rising and money is losing its value. It can result from either increase in aggregate demand or decrease in aggregate supply. Basically, there are two types of inflation, which are demand-pull inflation and cost-push inflation. Demand-pull inflation is results from an initial increase in...