ECONOMIC SYSTEMS - Part 2

⮚ Market Economy/ Lassez-faire/ Market Driven/ Free market/Capitalist

Economic decisions are made by individuals. The unfettered interaction of individuals and
companies in the marketplace determines how resources are allocated and goods are distributed.
Individuals choose how to invest their personal resources—what training to pursue, what jobs to
take, what goods or services to produce. And individuals decide what to consume. Within a pure
market economy the government is entirely absent from economic affairs. The United States in
the late nineteenth century, at the height of the lassez-faire era, was about as close as we have
seen to a pure market economy in modern practice. Since businesses aims are to make profit,
they will only produce what consumer demand

Advantages
1. Market economies can adjust to change easily. If there is a demand for one thing,
companies have the ability to change what they produce instead of having to go through
too much government protocol first.
2. Rational self interest in market economies are also encouraged. People have the ability to
make as much money as they can and do what is in their best interest.
3. Government tries to stay out of the way of businesses. Although the government sets
certain standards businesses must follow, for the most part businesses can do as they
please, allowing them to produce what they want, how they want.
4. There is a great variety of goods and services for consumers. If there is a demand for a
good or service, the demand will almost always be met in a market economy.

Disadvantages
1. This type of economy does not always provide the basic needs to everyone in the society.
The weak, sick, disabled, and old sometimes have trouble providing for themselves and
often slip into poverty.
2. It becomes hard for a government with so many private businesses to provide adequate
defense, education, and health care to its people.
3. There is uncertainty in the business world. One company could easily be forced out of
business causing all of its employees to become unemployed and lose their means of
income.
4. Occasionally there are market failures. This can cause some companies to become way to
powerful and become a monopoly. If the government doesn’t step in, the monopoly can
take advantage of the consumers and charge ridiculously high prices

Implications of the free market system

i. Resources are allocated automatically y the forces of demand and supply, if more people
decide to buy a product, the business will expand output, hire more factors of production
and earn more revenue.
ii. Competition should lead to lower cost and improve quality as firms try to impress
consumers. Innovation might also be more widespread as firms try to develop products
to offer more choices and new production techniques to lower cost.
iii. There is market imperfection as large firms may dominate an industry by driving out
competition. The large company can then force up prices and exploit consumers.
iv. Resources are not wasted in the production of unwanted goods.
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v. Some goods are not provided by private firms. These include defense, but also services
where they may not make a profit
vi. There is often an unequal DISTRIBUTION OF INCOME. Groups that cannot be
involved in economic activity, such as the old or the ill, may have little or no income.
Owners of profitable businesses can build up great wealth.
vii. There should be a wider choice of goods and services
viii. Individuals are free to set up in business and to choose how to spend their income.

⮚ Mixed Economic System

(characteristics or features)
This economy combines elements of the market and command economy. Many economic
decisions are made in the market by individuals. But the government also plays a role in the
allocation and distribution of resources.
The United States today, like most advanced nations, and Caribbean countries is a mixed
economy.
Advantages of Mixed Economy
1. Since mixed economy involves both government and private enterprises it has the advantage
of taking the benefits of capitalist nature of private companies and socialist nature of
government.

2. There is less inequality of income because intent of government is to have a balanced

economic growth of an economy.

3. Mixed economy allows individuals to run their business and make profits but at the same
time it places some responsibility on these companies by inducing them to contribute towards
the welfare of society.

Disadvantages of Mixed Economy

1. Since welfare of society is important in a mixed economy it leads to lower than optimum use
of the resources because government mobilize the resources towards the production of those
goods and services which are beneficial for the society as a whole rather than producing
those goods and services which in economic terms are more beneficial for an economy.

2. Under mixed economy private enterprises have to face lot of difficulty because of various
government loopholes like favoritism and bureaucratic nature which is prevalent in mixed
economy.