Economic Systems & Goods
In this lesson, you’re expected to:
– learn about the types of economic systems
– understand different types of goods: normal, inferior, final, and intermediate goods
– discover how complements and substitutes are used
In order to survive, societies must make decisions about how best to use their scarce resources (land, labor, capital, entrepreneurial ability).
Economists have concluded that for this to be possible, three basic questions must be answereed:
1) What to produce?
2) How to produce?
3) For whom to produce?
All economic systems deal with three processes:
(1) production, (2) distribution, and (3) consumption of goods and services.
Societies in different regions, times, and cultures have developed different ways of structuring these processes.
Let’s explore the different types of economic systems.
1) Traditional Economies
In a traditional economic system, the questions of what and how to produce and whom to produce for are answered by tradition.
In this type of system, stability and continuity are favored over innovation and change. The roles of the people are defined by gender and status in the community.
2) Market Economies
Market economies are characterized by a lack of centralized decision-making. As opposed to top-down planning, market economies operate bottom-up. Individuals trying to satisfy their own self-interest answer the questions of what, how and for whom to produce.
Private citizens, acting on their own free will as buyers or sellers, trade their resources or finished products in the market in order to increase their own well-being.
Market economies achieve greater abundance, variety and satisfaction than traditional economies.
Defining Market Economies
A market economy is an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country’s individual citizens and businesses. There is little government intervention or central planning.
3) Command Economies
In a command economy, the government controls all economic activity. One example of a command economy is communism.
In a government-directed economy, the market plays little to no role in production decisions. Command economies are less flexible than market economies and react slower to changes in consumer purchasing patterns and fluctuations in supply and demand.
Certain resources are allocated through the market and others through the state. The proportion of government controls and response to market forces varies – some countries rely more on market emphasis and others on state planning.
It is the scarcity that creates a value people become willing to pay for, which in turn creates an opportunity cost.
The main feature of an economic good is that if it can have a value placed on the good, it can be traded in the market place and valued using a form of money.
An economic good is a physical object or service that has value and can be sold.
It is a consumable item that is useful to people but scarce in relation to its demand, so that human effort is required to obtain it.
Let’s take a look at some types of economic goods:
• Final Goods
• Intermediate Goods
• Normal Goods
• Inferior Goods
These goods include:
• Goods purchased by consumer households as they are meant for final consumption (like milk or bread).
• Goods purchased by firms for capital formation or investment (like machinery).
These goods include:
• Goods purchased for resale (e.g. milk purchased by a dairy store).
• Goods used for further production (e.g. milk used to make sweets).
They are generally purchased by one production unit from another production unit. However, all purchases by a production unit from another production unit are not intermediate purchases.
Furniture, clothing, and automobiles are some common examples which fall under this category.
In economics, inferior goods do not mean sub-standard goods but it relates to the affordability of the goods.
These goods are the ones whose demand drops with the increase in consumer’s income and vice versa. Such goods have better quality alternatives.
An example of an inferior good is a Supermarket’s private label brand.
Inferior goods are not the same worldwide. Fast food can be considered an inferior good in many western countries, while emerging economies may consider it a normal good.
In a recession, with falling incomes, inferior goods can face a higher demand. Stores may push these cheaper value ‘inferior’ goods because there will be higher demand.
As countries increase GDP, their populations give up inferior goods for normal goods. This is evident in places like China and India as millions of people leave a basic lifestyle and move into the middle class.
If the price of one good falls and people buy more of it, they will usually buy more of the complementary good also whether or not its price also falls. Similarly, if the price of one good rises and reduces its demand, it may reduce the demand for the paired good as well.
Substitute goods are two goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise.
For instance, Microsoft Windows-based personal computers and Apple Macs are substitutes. If you buy one, you probably don’t buy the other. Sprite and 7-UP are another example of substitute goods.
The good functions just the same as the one it is being compared to.
For example, Coke and Pepsi are perfect substitutes for one another (though some may argue that they taste different!).