The forces of market demand and supply, without any government intervention, determine how resources are allocated. This is known as the working of the price mechanism. The basics of this are covered in the theories of demand and supply later on in this revision guide.
a. What to produce is decided upon by the profitability for a particular product.
b. When demand for a product is high, the price rises and this raises the profitability of selling in the market .
c. High prices and high profits provide the signal for firms to expand production. .
d. Supply from producers responds to consumer wants and needs expressed through the price mechanism .
e. The consumer is said to be sovereign - their "economic votes" determine how resources are allocated .
2. Collectivist, communist, socialist, planned, controlled or command.
A command economy is one where all key economic decisions are made by the government (or state). The government decides what to produce, how it is to be produced and how it is to be allocated to consumers. This involves a great deal of economy planning by the state. The price mechanism has no active role in a pure command economy since market prices are rarely used. By state planning, goods and services can be produced to satisfy the needs of all the citizens of a country, not just those who have the money to pay for goods. Over the last decade, many former planned economy have attempted to bring market forces into their economy. .
3. Traditional.
a. There is little specialization and trade within the economy and with other countries.
b. The productivity of workers tends to be low leading to low incomes and a poor standard of living .
c. People tend to live in family groups, and grow most of their own food, make their own houses, gather their own fuel and provide their own leisure activities i.e. to a great extent they are self-sufficient .
d. Few goods and are marketed and command a price or value - there is little surplus production to export .
