Understanding Economic Systems: Production and Distribution
What to Produce?
The decision of what and how much to produce is an immediate consequence of the allocation of land, labor, and capital. Choosing to produce spacecraft, for example, will surely decrease the production of fridges, televisions, cars, or houses, as resources are scarce. This production decision involves an opportunity cost.
How to Produce?
The answer to this question relates to the choice of production technique. If several techniques exist, the consequence of this choice can be significant for the entire economic system. Technological changes induce changes in the way we produce, leading to a constant reorganization of the three factors of production: land, labor, and capital.
For Whom to Produce?
The answer to “for whom to produce” addresses the problem of distributing goods and services derived from those who contribute to their production. No known procedure automatically solves and satisfies everyone regarding income distribution. Owners of production factors have resorted to a third party, the government, to complete the distribution process and attempt to resolve this issue. In most modern economies, part of the production sometimes goes to the government through taxes, which then supplies the goods.
Capitalist Economic Systems
Capitalist economies are characterized by a limited role of government, both in its regulatory aspect of economic activity and as a supplier of goods and services to the community. The ownership of factors of production is primarily in private hands, and the supply of private goods and services far exceeds that of public goods and services.
- There is usually a social objective of full employment.
- Great concern exists for the equitable distribution of wealth produced.
- The distribution of goods and services also takes place in the market and is influenced by supply and demand conditions in each production sector.
- Another facet is a sharp cyclical nature of production and employment.
- In unaudited economies, specialization and division of labor are prevalent.
Communist or Planned Economic Systems
In stark contrast to capitalist economies, in socialist or planned economies, the regulatory activity and production of the state leave no room for private business.
- The ownership of productive factors, especially capital and land, is solely or majority state-owned.
- Product distribution does not use the market mechanism.
- There are few places for families and businesses to meet consumer needs, and intervention in quantities and prices is predetermined by the central planning agency.
- Goods and services are public and are accessed based on a deal set by the government, not purchasing power.
- Resource allocation pursues the full use of resources, and these economies, at least officially, have no unemployment.