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Economic Systems and Macroeconomics

Updated: Dec 30, 2021

Economics is the study of people and choices. This pretty much incapsulates everything in some way. In this article I will be covering economic systems and macroeconomics. This is more focused on high level systems, but it can still be made relevant in your life. So while reading, think about "How does this impact me?"

This post is based off the crash course economics playlist which you can check out here:

We all have wants. But we can’t get everything we want. This is because we don’t have unlimited resources. So we have to make the best out of what we have.

As a social order, we have to answer three things.

  1. What will we produce?

  2. How will we produce it?

  3. Who gets it?

Once these three questions are answered, you have an economics system! There are two different economic systems in the world today. Free market economies, and planned economies. The main thing that controls which of these economic systems it is, is who controls the factors of production. The factors of production are the main requirements that you need to produce things.

A planned economy is when the government controls the factors of production. Now, even though it may seem like it, a planned economy is not exactly communism. The government does control the factors of production, but the output of that production is not distributed equally.

No country has been fully communist. Countries have been socialist. But there is something that communism and socialism have in common. In both communism and socialism, the government decides all the questions mentioned earlier that make up an economic system.

In a free-market economy, individuals control the factors of production instead of the government. Capitalism is a free market economy. Also, in a free market economy, the government doesn’t interfere and let the people take their own course. To fail, and get back up again without the support and a crutch to support them financially.

In a free-market economy, businesses have the incentive to try to make their product the best it can be. They want to show their product is best for the customer to try to get as much money as possible. Instead of not trying or even caring about the product because the government has total control and it won't matter.

Producers also have to determine the right price in order for consumers to want to buy their products. So they can’t get showered in money because they are the only ones who sell a certain product. In a free-market economy you can choose different brands based on your preferences. More incentives for business owners to want better for the customer. And when a business has more customers, it has more of an incentive to produce more of their product, allowing businesses to grow no matter what the government’s doing.

Scarce resources will be more valuable and will be used efficiently because it is so rare. If there are no consumer demands for a product, resources won’t be wasted producing it. If a government was in charge of choosing what should be produced, things wouldn’t be able to quickly adapt to different trends and wants. So things wouldn’t be produced efficiently when there aren’t any incentives.

When individuals seek their own self needs in the free market, things end up being produced more efficiently because of their own self needs. Usually, their self-interest is money, so they will most likely fit society's wants for it.

It may seem like the free market doesn’t need the government at all. But actually, that’s not entirely the case. The free market still needs to be governed by laws. So public goods and services, like roads, can be provided.

Sometimes the government has to step in when things go wrong. When we are thinking about what we want to buy, we look at the product and how its appearance is, how functional it is, etc. We usually don’t think about what happens after we buy the product, or what happened before we bought the product. An example is cars. Humans don’t really think too much about air pollution, or how much the hands that made the car were paid. The government is here to look into these details and to make sure corporations aren't taking advantage of anyone in any way. One of the thing that the government does is regulate how much the workers get paid.

Also, products have to be made up of the government's safety standards. In case you didn’t know, the government tests cars to make sure they are safe for people to ride in.

Most of our economies today are not completely free markets or planned economies. There is a mix of the two.

We should keep in mind that economies can also change. China was a very planned economy, but is now starting to become more of a free market. So China actually has a socialist economy.

We are not sure if the free market economy is really better for the economy. Or what variation of the different economic systems is best. It is hard to know if you are actually benefiting your incentives and economy. There are different outcomes in different countries and it is hard to know what to do. And looking at all the circumstances, we can see that there is no perfect amount of government involvement.

There is always an opportunity cost. And trying to decide if it is really worth it, can be very hard. Sometimes there will be tradeoffs that you may think are not appropriate. These decisions will vary in popularity depending on different people.

We should look at all the different pros and cons of the free market and planned economies. To see what we loopholes are and the little hacks that come with the economic system. But we also must see the limitations that economics systems have. No economic system can be perfect, but by using economics, we can try to make it the best it can be.


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