BHHT1123

HOSPITALITY ECONOMICS

LECTURE 2

Economic Systems
Learning Objectives

On completion of the chapter, the student

will be able to:

❑Define the types of economic systems

❑Explain how different types of economic
systems to answer the three key economic
questions
Economic Systems

➢ Economic System: the way of

organizing the relationship
among__________, __________
and __________________on how to
make choices when confronted with
basic economic questions.
ECONOMIC SYSTEM

TYPES OF ECONOMIC SYSTEM

MIXED ISLAMIC
ECONOMY ECONOMY
 CHARACTERISTICS

CAPITALISM
➔An economic system where
individuals
make economic decisions using a
price system, without any
government intervention or control

MERITS AND DEMERITS

CHARACTERISTICS

❑ Private ownership of resources

❑ Freedom of enterprise and choice
❑ Consumers’ sovereignty (taste/ preferences)
❑ Competition (highly competitive among
producers—highest profit)
❑ Government intervention
❑ Price system (“invisible hand”- Adam Smith)
 MERITS DEMERITS
❑ Production according to ❑ Inequality of distribution of
___________________________ wealth and income (widen
(satisfaction) gap)
❑ Economic freedom (earn & retain ❑ Inflation and
property) ________________________
❑ ___________________________
(due to business fluctuations)
(quality, cost, production ❑ Lack of social welfare
tecniques) (pension, social security or
❑ Variety of consumer goods
accident benefits; undesirable
(shape, colour, design and social effects-theft/ crime)
packaging) ❑ Wasteful competition
❑ Enhanced trade, business and (consumer misinterpreting
R&D (innovation, increase advertisements – being
employment, copyright, patents) misled)
❑ Misallocation of resources
❑ Automatic incentives (price
mechanism) (luxury goods- surplus)
❑ Social cost (social problems:
❑ Flexibility (changes with
circumstances) health, pollution)
 CHARACTERISTICS

SOCIALISM
➔An economic system where all
the economic decisions
are made by the government or a
central authority

MERITS AND DEMERITS

CHARACTERISTICS

❑ Public ownership of resources (in the

interest of society as a whole – equal
opportunity)
❑ Central planning authority (current
consumption & future investment)
❑ Price mechanism of lesser importance
(public interest, private profits not allowed)
❑ Central control and ownership (fully planned
economy, G intervenes in all aspects of
economic activities)
 MERITS
❑ Production according to basic
need (food, clothing & building
materials)-national priorities
❑ Equal distribution of income
and wealth
❑ Better allocation of resources
❑ No serious unemployment or
inflation (economy stability)
❑ Rapid economic development
(resource, planning & quick
decisions)
❑ Social welfare (labour dispute/
wastage of resources?)
DEMERITS
❑ Lack of incentives and
initiative by individuals (not
motivated)
❑ Loss of economic freedom
and consumer sovereignty
(no choice)
❑ Absence of competition
❑ Waste of economic
resources (not required by
the people – military
equipment)
Mixed Economy

❑ Combines both capitalism & socialism to solve

basic economic problems.
❑ Public & private sectors play a role
❑ Most countries practice a mixed economy
Characteristics
❑ Public and private ownership of resources
❑ Price mechanism and economic plans in
making economic decisions
❑ Government helps to control income disparity
(taxes, welfare payments, subsidies)
❑ Co-operation between the government, public
and business sectors (low cost housing
projects)
❑ Government control of monopolies
 CHARACTERISTICS

ISLAMIC ECONOMY
➔An economic system which
combines both capitalism
and socialism and follows the
principles of Syariah
CHARACTERISTICS

❑ Public and private ownership of resources

owned by God
❑ Price mechanism and limited government
intervention (forces of demand & supply)
❑ Distribution of wealth (based on the needs
of consumers)
❑ Prohibition of interest (riba)
❑ Freedom of economic enterprise (basic
necessity for survival)
Key Economic Questions

▪ Because of scarcity of resources, all

societies face three key economic
problems:

1. ____________goods will be produced?

2. _____________will the goods be
produced?
3. _____________will the goods be
produced?
TYPES OF ECONOMIC SYSTEMS

➢ There are hundreds of countries but only

two major economic systems.
➢ Two major systems: Socialism and
Capitalism.
➢ Most countries have chosen elements
from both economic systems (Mixed
Economies)
Mixed Capitalist Economies

➢ An economic system characterized by

largely private ownership of factors of
production, market allocation of resources,
and decentralized decision making.
➢ Most economic activities take place in the
private sector in this system, but
government plays a substantial economic
and regulatory role.
➢ The United States has a Mixed Capitalist
Economy.
Economic Systems and the PPC:
Who Decides Where the Economy
Will Operate on the PPC?
Capitalism Economy:
The Market Decides

Socialism Economy:
The Government Decides
1.What Goods Will Be Produced?

➢ This is really asking “Where on the

PPC will an economy operate?”
➢ Capitalism: The Market will dictate
what goods will be produced.
➢ Socialism: The Government will have
a large role in determining what will
be produced.
2.How Will The Goods Be Produced?

➢ Capitalism: decided by private

producers.

➢ Socialism: Government plays a

large part in deciding how goods
will be produced.
3.For Whom Will The Goods Be Produced?

➢ Capitalism: goods will be produced

for those persons who are able and
willing to pay the prices for the
goods.

➢ Socialism:more government control

over who gets what goods.
Trade
➢ Capitalism: both parties benefit from
the trade.

➢ Socialism: trade is viewed as making

one person better off at the expense
of another person.
Prices
Capitalism :
❑ Prices_____________________________
❑ Prices_____________________________
❑ Prices serve as an _______________to
respond to information

Socialism :
❑ Price is viewed as being set by greedy
businesses with vast economic power