CHAPTER3

ECONOMYSYSTEMSORMARKETSYSTEMS

WhatI
sAnEconomy System ?Thesearethesetofrul
esandr
egul
ati
ons
t
hatar
edi
rect
edtowar
dstheproduct
ionofEconomicgoods.

Broadl
yspeaki
ng,t
heeconomysy
stemsar
ecl
assi
fi
edi
nto4cat
egor
ies
namely
:

1.TRADI
TIONALECONOMY

Thi s Economy sy st
em hel pt o answerthe Economi c questi
ons of
(what ,
how andforwhom t opr oduce)byr
elyingenti
rel
yoncust omsand
tradit
ions.Iti
susuall
yassoci atedwithcul
turesthatpract
isesubsist
ence
agricult
ure,wit
hcustomsandeconomi cr
olesbei ngpasseddownf rom
gener ati
ontogenerat
ion.Anexampl eofthi
smi ghtbesomet r
ibalsoci
eties
foundi ntheAmazonRi verBasin.

2.MARKETECONOMY(
LAI
SSEZFAI
REORCAPI
TALI
STECONOMY)

Inamar keteconomyt heproblem ofwhatt oproduce,howandf orwhom to

producear ehandlebypri
vateindiv
iduals.Theresourceal
locati
oniscarr
ied
outbypr i
vateindi
v i
dual
sonly.Allf
actorsofproducti
onarepr iv
atel
yowned
andmanaged.Ther eisnogov er
nmenti nter
venti
onandev eryoneisfr
eeto
operateaccor dingtohiswil
landdesi r
e.Thissystem ismainl
y
characterizedbyt hePri
cemechani sm
 FUNCTI
ONSOFTHEPRI
CEMECHANI
SM I
NAFREEMARKET

1)Itrati
onsgoodsandservi
cestomanycompetingbuyers:Whenmany
peopledemandacommodi ty,t
hepri
cewi
llri
seandonlythosewhocanpay
thepriceendupconsumingthecommodi
ty.Thegoodwillberat
ionedonl
y
tothosewhocanpayt hepri
ce.

2)Itrewardsfactorsofproducti
on:Mar ketf
orcesi nthefact
orsmarket
determinetheirv
ari
ousrewar ds(rents,
inter
ests,profi
tsandwages).An
i
ncreaseint hedemandf orland,f
orinstance,wil
lleadtoar i
seinr
ents.
Factorsarerewardedast heyarebeingusedi nproduction.

3)Itre-al
locat
esresources:I
tmov esresourcesfrom l
eastprof
it
abl
e
i
nv est
mentt oprof
it
ableones.Changesinpr i
cesindi
catechangesin
profi
tabil
i
tyandmot i
vatetheproducer
stor e-
all
ocatethei
rresour
ces.

Char
act
eri
sti
csOfMar
ketEconomySy
stem

Pricemechani
sm manipul
atestheal
locat
ionofr
esour
cesortr
iest
o
resolv
ethethr
eefundamentalquest
ionsofwhat
,howandforwhom
toproduce

Consumer’
ssover
eignt
yexi
sts,
thi
smeanstheconsumerisaki
ng
becausehei
nfl
uencetheal
l
ocati
onandPr
oducti
onofresour
ces.

Pr
oducer
sai
m atpr
ofi
tmaxi
mizat
ionandr
elyonhi
gherpr
ices
 Competit
ionamongfirmsexi
stsandbasi
call
yiti
st hi
scompeti
tion
whichencour
agestechnol
ogi
calchange,
innovat
ionandhigher
i
nvestment.

Easymobil
i
zat
ionofcapi
tal
duet
opr
ofi
tmaxi
mizat
ionandr
egul
ar
i
nnovat
ions

Ther
eisabsenceofgov
ernmentcont
rol
toanext
ent

Adv
ant
agesOfMar
ketEconomy

1.Therei
sconsumersov
ereignt
y:Thismeansthatconsumer
scan
i
nfluencewhatgoodsar
eproduceddi
rectl
ybythei
rpurchase

2.Themarketpr
ovi
desawi
dev
ari
etyofgoodsandser
vicest
omeet
consumer
’swants.

3.Themar ketsystem prov

idesincenti
vestoproducer
sintheform of
prof
it
sandwor kersintheform ofhigherwages.Bysodoingthi
s
encourageentr
epreneurstoproducehighquali
typroduct
sandt oi
nnovat
e.

4.Thereisgreateref
ficiency.Theaim offi
rmsinamar keteconomyist
o
makemaxi mum pr ofi
t.Hence, themarketsyst
em encourages
technol
ogicalchange,thatis,theuseofnewandbet termethodsand
machinestopr oducegoodsandser vi
cesatlowcost.
 Di
sadv
ant
agesOfMar
ketEconomySy
stem

1.Ther
eispr
icei
nst
abi
l
ity

2.Unequal
redi
str
ibut
ionofi
ncomeand

weal
th.Ther
ichpeopl
ebecomeRi
cher

3.Ther
eisPr
oduct
ionofhar
mful
Goods.Li
keCocai
ne,
il
legal
drugs.

4.Hi
ghnegat
iveext
ernal
i
tiessuchasai
rpol
l
uti
on,
congest
ion

5.Thi
smayl
eadt
oWast
ageofEconomi
cresour
cesduet
oCompet
it
ion.

3.PLANNEDECONOMY(COMMANDECONOMY)

Apl
annedeconomyi st hedi
rectopposit
eofthemar keteconomy .Hereal
l
t
heresourcesareownedbyt hegovernmentorthepubl i
csectorwhichis
t
hecentralbodydeci
dingupont heal
locati
onofresources.

Char
act
eri
sti
csofcommandeconomy
1.Slowdecisionmaking.Si
ncedecisi
onsar
ebasedonparl
iamentaryl
evel
,
theyar
enotr eadi
l
yimplementedinthi
sway,sev
erali
mpor
tantdecisi
ons
concer
ningsocio-
economicacti
vi
tiesmaybedelay
ed.

2.Inef f
ici
ency
.Acommonf eat
ureagai
nstthepubli
csectori
sineffi
ciency
andlackofcompetence.Theatt
it
udeofasecuredjobinthegovernment
sectormakesworkersi
dleandcarel
essaboutthequali
tyofser
vicestobe
providedtothemembersofthepubl
ic.

3.Ther
eisabsenceofcompet
it
ion

4.Rest
ri
cti
ononconsumer
’ssov
erei
gnt
y.

Sincether
eiscentr
alall
ocati
onofr esources,
consumer smaydemand
whattheywishbuttoar est
rict
edextent.Theproducti
onofluxuri
esis
givenastheul
timatepri
orit
ybyt hegovernment.Pr
iori
tymustbegivenonl
y
totheproduct
ionofthemostessent ial
productsinthesoci
ety.

Adv
ant
agesOfCommandEconomy

1.Ther
eisequal
redi
str
ibut
ionofi
ncomeandweal
th.

2.Pr
icest
abi
l
ityduet
ogov
ernmentcont
rol

3.Ther
eisr
educt
ionofnegat
iveext
ernal
i
ties
4.Pr
ovi
sionofmor
emer
itandpubl
i
cgoods

5.Therei
sProduct
ionofl
esshar
mful
goodsduet
ogov
ernment
i
nterv
enti
on

Di
sadv
ant
agesOfCommandEconomy

1.Absenceofconsumersov
erei
gnt
y.

2.Slowdecisionmaking.Si
ncedeci
sionsar
ebasedonpar
li
amentarylev
el,
theyar
enotr eadi
l
yimplementedinthisway
,sev
erali
mpor
tantdeci
sions
concer
ningsocio-
economicacti
vi
ti
esmaybedelayed.

3.Inef f
ici
ency
.Acommonf eat
ureagai
nstthepubli
csectori
sineffi
ciency
andlackofcompetence.Theatt
it
udeofasecuredjobinthegovernment
sectormakesworkersi
dleandcarel
essaboutthequali
tyofser
vicestobe
providedtothemembersofthepubl
ic.

4.Ther
eisabsenceofcompet
it
ion

4.MI
XEDECONOMY

I
nami
xedeconomi
csy
stem,
resour
ceal
l
ocat
ioni
sinf
luencedbot
hbyt
he
pri
vateandpubl
icsectors.I
notherwords,
inthisEconomysystem
,economicdeci
sionsaretakenbythepri
vateindi
vi
dualsandsomebyt he
government
.Exampleofmi xedeconomyinclude:Cameroon,France

Rol
e/Funct
ionsoft
hegov
ernmenti
nami
xedeconomy

1.Inamoder nmixedeconomy ,t
hegov er
nmenthast ointervenetopr
event
theprov i
sionofHar mfulgoods.Iflef
ttothepricesystem,therewil
lbeover
-producti
onandov er
-consumpt i
onofdemer i
tgoodsl i
kedr ugs,ci
gar
ett
es
andal cohol.Hence,thegovernmenthast odiscourageconsumpt i
onof
thesedemer i
tgoodst hr
ought axat
ion.

2.Thegov er
nmenthast opr
ovi
depubli
cgoodsinamoder nmi xed
economysinceprovi
sionsofthesegoodsaredif
ficultandunsuit
ablei
nthe
handsofpriv
atesect
or s.Def
ence,r
oads,st
reet
-l
ightningar
epr ovi
dedby
thestat
eineverymoder nmixedeconomy.

3.Thegov ernmentinterv
entionisnecessar
ytocorrectt
heexternal
it
yby
makingrulesandr egulat
ions.Thegovernmentsubsidi
seacti
vit
ieswhich
causeexternalbenefi
ts,whil
eimposet axat
iont
or educeext
ernalcosts.

4.Mostgovernmentinmodernmixedeconomyhavepolici
esdesignedto
di
scouragefi
rmstoactasmonopol y
.Inmanycount
ries,
important
l
egisl
ati
onsarepassedtoregul
ateexi
sti
ngmonopol
iesandprev ent
i
nformalagr
eementswiththemainaim ofmaki
ngprofi
tsbyexploit
ing
consumers.

5.Thegov
ernmenthav
easr
olet
oinsur
eequal
redi
str
ibut
ionofi
ncome
andweal
thbet
weent
her
ichandt
hepoorcl
ass.

6.Thegov er
nmenti sequal
lyoutt
oachi
evemicroandmacroEconomi
c
object
ivesli
kepricest
abil
it
y,empl
oyment,
regi
onaldev
elopment
,
favour
ablebalanceofpayment.