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Economic Systems

Economic Systems. How are resources allocated?. Topic Plan. Scarcity The Market economic system The Command economic system The mixed economy Market Vs Command systems. Economic Systems. The way a nation is organised to respond to the problem of scarcity

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Economic Systems

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  1. Economic Systems How are resources allocated?

  2. Topic Plan • Scarcity • The Market economic system • The Command economic system • The mixed economy • Market Vs Command systems

  3. 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 : • 1. What to produce • 2. How to produce • 3. For whom to produce

  4. Unlimited Needs and Wants Scarce Productive Resources Relative Scarcity Basic Economic Questions The Need for an Economic System

  5. Types of Economic Systems • The Market economy • The Command economy • The Mixed economy

  6. 1. Market Economies • Also called capitalist or private enterprise systems. Features are: • Productive resources are mainly owned by private individuals.

  7. Features of market economies (cont.) • Economic decision making is decentralised (i.e. decisions are made by individuals ) and the level of government intervention is low. • Economic motivation is self interest (e.g profit motive)

  8. Features of market economies (cont.) • Price is major criterion to allocate goods and resource ( price system/mechanism ). • Efficiency is valued or rewarded.

  9. 2. Command Economies • Also called socialist or centrally planned economies. Features are: • Productive resources are owned mainly by the state or the government.

  10. Features of command economies (cont.) • Economic decision making is made by a central authority or the government • Goods/services are distributed to benefit the state as a whole, rather than individuals

  11. Features of command economies (cont.) • Non-price mechanisms such as queuing, rationing coupons are used to allocate goods among people. • Equity is valued.

  12. 3. The Mixed Economy • All modern economies are said to be a mixture of - market forces ( price system ) 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

  13. Economies in Transition The ll-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

  14. Economies in Transition 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 on-state?industrial firms (eg collectives, local government)

  15. Market Vs Command Systems • Advantages of market systems • eg: economic freedom, efficiency etc • Disadvantages of market systems • eg: unequal distribution of income and wealth • Advantages of command systems • eg: Equity ( in theory ) • Disadvantages of command systems • eg: inefficiencies and waste

  16. The End

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