Page 6: Economic Systems and Money Functions

The final section contrasts different economic systems and explores the fundamental functions of money in an economy.

Definition: A free market economy operates with minimal government intervention, while a command economy features complete government control.

Example: The United States and Hong Kong represent relatively free market systems, while North Korea exemplifies a command economy.

Highlight: Most modern economies are mixed systems, combining elements of both free market and government control to achieve optimal economic outcomes.

The Three Economic Questions and Production Possibility Frontiers

This section explores the three fundamental economic questions that all societies must address:

1. What to produce?
2. How to produce?
3. For whom to produce?

The concept of Production Possibility Frontiers (PPFs) is introduced, illustrating the maximum productive potential of an economy and the opportunity costs associated with resource allocation.

Vocabulary: Production Possibility Frontier (PPF) - A graph that shows the maximum possible output combinations of two goods or services an economy can produce, given its resources and technology.

The PPF demonstrates:

• Efficient resource use (point A on the curve)
• Aspirational production beyond current capabilities (point B outside the curve)
• Underutilization of resources, such as unemployment (point C inside the curve)

The section also distinguishes between consumer goods and capital goods:

• Consumer goods: Cannot be used to produce other goods (e.g., clothing)
• Capital goods: Can be used to produce other goods (e.g., machinery)

Example: A factory that produces both cars and computers might be represented on a PPF, showing the trade-off between producing more of one good at the expense of the other.

Specialisation and Division of Labor

This section explores the concept of specialisation in economics, which refers to focusing on producing goods or services in which a worker, firm, or country is most efficient.

Advantages of specialisation include:

• A larger range of goods, helping to address scarcity
• Higher quality goods
• Economies of scale, leading to lower production costs

Disadvantages of specialisation include:

• Over-reliance on a single commodity
• Vulnerability to changing tastes and fashion

The division of labor, a related concept, involves breaking down the production process into specialized tasks.

Quote: "The idea of division of labor was made by Adam Smith, who also introduced the concept of the 'invisible hand' in economics."

Example: Car manufacturing and tennis ball production are examples of industries that heavily utilize specialisation and division of labor.

Highlight: While specialisation can lead to increased efficiency and productivity, it's important to consider its potential drawbacks, such as the risk of over-dependence on specific industries or skills.