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Chapter 2 Economic systems. Lecture Plan. Scarcity and economic systems The market economic system The command economic system The mixed economy Market systems versus command systems Advantages and disadvantages. Economic Systems.
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Lecture Plan • Scarcity and economic systems • The market economic system • The command economic system • The mixed economy • Market systems versus command systems • Advantages and disadvantages
Economic Systems • The way a nation is organised to respond to the problem of scarcity • Different economic systems use different methods to answer the Basic Economic Questions, that is: • What to produce • How to produce • For whom to produce (cont.)
Economic Systems (cont.) Unlimited Needs and Wants Scarce Productive Resources Relative Scarcity Basic Economic Questions The Need for an Economic System
Types of Economic Systems • The market economy • The command economy • The mixed economy
1. Market Economies • Also called Capitalist or Private Enterprise systems Features are: • Productive resources are predominantly owned by the private sector • Economic decision making is decentralised, i.e. the level of government intervention is low • Economic motivation is self interest (utility or profit)
Market Systems: Advantages and Disadvantages • Advantages of market systems • Economic freedom • Minimum state intervention maximises individual welfare • Efficiencies (in production, distribution and consumption) • Disadvantages of market systems • Unequal distribution of income and wealth • Exploitation of the economically poorer and less powerful • Disadvantaged groups (e.g. migrants, long-term unemployed) are unfairly treated
2. Command Economies • Also called socialist or centrally planned economies Features are: • Productive resources are owned predominantly by the state or government sector • Economic decision making is undertaken by a central authority or government • Collective welfare (i.e. goods/services) distributed to benefit the state as a whole, rather than individuals • Allocation by non-price mechanisms • Equity is valued
Command Economies: Advantages and Disadvantages • Advantages of command systems • Abundant provision of collective goods (e.g. education, health, public transport and recreational facilities) • The government provides employment security • Equal opportunity and equity • Disadvantages of command systems • Inefficiencies and waste of human resources • Cumbersome decision making
3. The Mixed Economy • All modern economies are said to be a mixture of • market forces and • government intervention • In the past, major examples of centrally planned economies were the former USSR and China. These now have allowed levels of market forces to operate
Economies in Transition The ‘All-Out’ Approach • Examples: Poland, East Germany, Russia, Czech republic • Rapid price and trade liberalisation • immediate opening of markets • privatisation of most state-owned enterprises • reform of tax, legal and financial system (cont.)
Economies in Transition (cont.) The Phased approach • Example: China • 1978—opening the doors to joint ventures • Gradual price liberalisation • Agricultural reform • Reform of state-run enterprises • Relaxed restrictions on ‘non-state’ industrial firms (e.g. collectives, local government)
Convergence Theory • Many centrally planned economies have adopted elements of market economies and many capitalist economies continue to use aspects of government intervention