Economic system:

An organized way in which a state or nation

allocates its resources and apportions goods and services in the
national community.
To allocate/ To apportion = To share out according to a plan
Resources = Anything that is used to produce goods and services
SOME BASIC PREMISES
Resources are limited/ scarce.
Human wants exceed resources.
The economy decides how to allocate scarce resources by answering
some basic questions.
ECONOMIC QUESTIONSTYPE OF ECONOMY
What to produce?
How to produce?
For whom to produce?
Market / capitalist /free-market economies
Role of gov.: Limited (e.g., passes laws, provides essential goods &
services, ensures fair competition)

Ownership of resources: By private individuals.

Allocation of resources: By the market mechanism (forces of supply

& demand)

Competition: Yes.

Advantages: Competition lower costs, wider choice of goods and

services, better quality
Disadvantages: Firms may sacrifice public interest for profit, lower
costs and private interests, market imperfections, unequal
distribution of wealth
Planned / command economies
Role of gov.: Vital: owns resources, distributes goods and services,
plans, organizes and co-ordinates production

Ownership of resources: By the state

Allocation of resources: By the state

Competition: No.

Advantages: more equal distribution of income and wealth,

production for need, not profit
Disadvantages: No competition standardised goods of little variety
and low quality, consumer choice is limited, low motivation to work,
standard of living is lower
Mixed economies: the public sector
Role of gov.: Supplies some public goods and services free at point
of use (paid for by taxes.)

Ownership of resources: By the state

Allocation of resources: By the state

Competition: No.

Advantages: The state provides a minimum standard of living for

everyone (welfare state);
Mixed economies: the private sector
Role of gov.: Ensures fair competition. Some regulation of private
sector businesses through laws. Private sector businesses also
benefit from public goods and services.

Ownership of resources: By individuals and businesses.

Allocation of resources: Market system (market mechanism)

Competition: Yes.

VERBS NOUNS
Allocate

Compete

Plan

Produce

Organise

Allocation

Co-ordinate

Plan

Distribute

Organisation

Supply

Co-ordination

Command

Distribution

 Supply

Competition

Command

Production

1. a gain = an increase in amount

2. to levy a tax = to collect a tax on something
3. haven = Harbour for ships to seek shelter in stormy weather

levy (levies, levying, levied)

a tax
impose a tax
be liable to pay a tax
evade a tax
collect a tax
file a tax return
avoid a tax
raise revenue through
taxation

pay a tax on their income

government
government
citizens
citizens
government
citizens
citizens
government
citizens

1. People pay an income tax on their wages.

2. Certain profits are liable to a capital gains tax.
3. Customs duties are imposed on imports.
4. The government imposed a tax on inheritances. It is called an
inheritance tax.
5. Special taxes can be levied on petrol, tobacco and alcohol.
6. I forgot to file my tax return! Im afraid Ill be fined by the Tax Office.

Classification of taxes
Progressive tax / regressive tax / proportional tax

 depending on the tax rate

Direct tax / indirect tax
depending on who is taxed
Progressive, regressive, proportional taxes
Regressive tax: A tax that takes a larger percentage of income
from low-income people than from high-income people. It is
generally a tax that is applied uniformly. This means that it hits
lower-income individuals harder.
E.g., gas tax and cigarette tax.
Progressive, regressive, proportional taxes
Proportional tax: A system that taxes everyone at the same
rate, regardless of their income bracket. Also called: flat tax.
Supporters of a flat tax argue that it gives people incentive to earn
more, because they wouldn't be penalized by graduating to a higher
tax bracket (as they would in a progressive-rate system).
Direct or indirect taxes
DIRECT TAX
A tax placed directly on an individual or business.
INDIRECT TAX
Taxes that are levied on the production or consumption of goods and
services or on transactions, including imports and exports.
Group the different types of taxes from the vocabulary
exercise into these two groups.
Direct taxes
Income tax

Wealth tax
National insurance

Capital gains tax

Indirect taxes

Inheritance tax

Value-added tax (VAT)

Sales tax
Customs duty

PRIVATE SECTOR
incorporated unincorporated businesses
limited liability unlimited liability
legal entity
personal assets
ownership
decision making
shares
Incorporated ~ has a body => has legal standing => can be sued, etc.
E.g., Ltd., PLC
Unincorporated: the opposite of the above E.g., Sole trader, partnership
Unincorporated businesses are not legal entities on their own. This
means that the businesses themselves cannot be held liable for debt or
legal issues. Instead, all legal responsibility stays with the owner or
owners. The owners have unlimited liability for debts, which means
that they are responsible for all the debts of the firm even with their
personal assets (e.g., car, house, etc.).
Incorporated businesses are legal entities. This is necessary because
their ownership structure is not stable: shareholders can easily sell their
shares while others can become shareholders, i.e., owners. Therefore such
companies are financially and legally responsible for their own actions and
as a result, they can be taken over, sued and liquidated. Since the owners
(shareholders) are legally separate from the company, they have limited
liability for debts, i.e., they cannot lose more money than what they had
invested into the business when they bought their shares. All losses and
debts are covered by the companys assets.
A person's financial responsibility is limited to a fixed sum, usually the
value of a person's investment in a company. A shareholder in such a
company is not personally responsible for any of the debts of the
company, other than for the value of his investment in that
company. Limited liability
The owner(s) are personally responsible with their own wealth/assets
for any legal actions and debts the company may face. Unlimited
liability
How can a company go public? IPO = Initial Public Offering, flotation

 a company issues shares to the public for the first time. Shares are sold at
the stock exchange/market.
What happens if a company goes bankrupt?
To liquidate a company: to close a company and sell its assets
1. Private limited companies cannot sell their shares to the general public.
2. Public limited companies can sell their shares to the general public on the
stock exchange
3. Plcs are obliged to disclose their accounts at the end of the financial year,
because shareholders have a right to know how the company is doing.