Economics System

• Definition
An economic system refers to the way in which the
resources of a country are used to produce goods
and services and the manner in which those goods
and services are distributed for consumption.
 Characteristics of Economic System

• Economic System are characterised by the

following:-
Role of the Government
Freedom of Choice
Ownership of Resources
Price Determination
Who gains the profits earned
 Function of Economic System

The allocation of Resources

The organization of Production
The distribution of finished products
The promotion of Economic Progress
The maintenance of Economic Stabuilioty
 Fundamental Economic Questions
• All economics are faced with the same economic
problems that of limited resource and unlimited
wants.therfore every society has to choose how to
make the best use of their limited/scarce resources.
• This decision is determined by answering these three
fundamental economic questions.
• 1. What to Produce
• 2. How to Produce
3. For whom to produce
 Types of Economic Systems

• The four main types of economic systems are:-

1. Traditional Economic System
2. Free - Market /Capitalist Economic
System
3. Planned/Socialist /Command Economic
System,
4. Mixed Economic System
 Traditional Economic System
• Features:-
1. Existence was primarily based on
traditional and customs
2. Barter was the main form of trading
3. Individuals existed on a subsistence level
4. The decision of what ,how and for whom
was determined by customs and traditions.
5. Resources were owned on controlled by a
feudal lord.
 Example of Traditional Economic System

This System is found scattered in three continents:-

Remote area of South America
Remote area in Africa and
Remote area in Asia
 Advantage of Traditional System

• very member of the society knows exactly what he

has to do
• There is a strong social Network
• Position within the society is already established
• Basic Economic questions are already answered by
tradition and customs
• Life is generally stable, predictable and continuous
 Disadvantage of traditional System

• This type of society is very slow to change

• It does not take advantage of technology changes
• There is relatively little promotion of intellectual
and scientific development
• There is inefficient provision of goods and services
• There is inadequate use of skill in relation to the
factors of production
• No upward movement of labour takes place
 Free Market System

• Introduction: Market Systems

• Examples of the different types of Capitalism
• History of the U.S. Market Economy
• Advantage & Disadvantage of a Free Market
• Misconceptions and Criticisms
• U.S. Market Economy Compared to the rest of
the World
• Checks and Balances of the Free Market Economy
 Free Market Economic System

• laissez-faire
• welfare capitalism
• state capitalism
 Free Market/ Capitalist Economic
System
• Features:-
1. Government plays little role in economic activity
2. Emphasis is on freedom of the individual
( consumer and producer)
3. Private sector ( private firms and individuals)
answer the basic economic questions
4. Profit maximization is the goal in the economy
5. Price mechanism determines price in theis economy
Free Market / Capitalist Economic System

The core fundamentals of Laissez-Faire

economy (also known as “Free Market”) is
• The individual is the basic unit in society
• The individual has a natural right to freedom
• The physical order of nature is a harmonious
and self-regulating system
• Markets should be competitive
Free Market / Welfare Capitalist Economic
System
• welfare capitalism is an economic combination of traditional
free market principles mixed with laws or practices from a
welfare state. This helps individuals by offering minimum
wage pay, short work days, restrictions on working ages, and
unemployment benefits. In some countries, this type of
economy involves the use of government regulation to force
businesses to pay for these items in the form of taxes. For
example, government will require businesses to contribute a
portion of their profits to funds that will help pay for workers
who are injured on the job or receive termination from the
company. Welfare capitalism no longer exists in its original
form, it begun after the Industrial Revolution. A good example
of this is when Henry Ford began the “$5 day” and many
factory owners provided housing for their workers to live;
which gave rise to many of the own towns in which he did
business in.
 Free Market Economic System
State Capitalism
State capitalism on the other hand is more government
involved. In other words, means of production are
owned privately but the state has considerable control
over the allocation of credit and investment, the state
basically will intervene into the economy to protect and
advance the interests of large-scale businesses. Some
may argue that government involvement can hinder
innovation. However, Brazil is perhaps the best current
example of how a state capitalist system can build
innovative industries. Successive Brazilian governments
have intervened with incentives, loans, and subsidies;
to promote industries that otherwise would have
needed long term private investment to make them
competitive with U.S. and
 Capitalism Economic System is

• Capitalism is a free market system of

trade
• Capitalism made on the principle of
supply and demand
• Capitalism maintained through
competition.
 Advantages of Free Market
Economics

• advantages to this capitalism is that factors of

production only get produced due to the demand
that consumers are attempting to maximize.
• advantage of the free market economy is that in
this type of economy, individuals and firms purse
their own self-interest without any central direction
or regulation.
• Alarge variety of goods and services are produces to
satisfy the needs of consumers
 Advantages of Free Market
Economics

• Price are determined by the forces of demand and

supply
• There is freedom from government interference
• Efficient production is promoted since resources are
allocated to their most profitable use
• Competition among firms improves quality, keeps
prices low and spurs new technology and innovation
 Disadvantages of Free Market
Economics
• In a free market economy, certain goods and
services are either not provided at all or
inadequately provided by private enterprises,
because for most cases the profits and benefits to the
business are insufficient and not worth the risk.
• Private ownership of capital enables firms to gain
monopoly power in product and labor markets.
• Suince there is no government intervention
consumers could be exploited
 Disadvantages of Free Market
Economics ( Cont.)
• underemployment of resources will exist in the
industries which are declining due to a drop in
demand since there will be a dramatic time lag
before the resources can move into the new
expanding industries.
• it provides no mechanism to ensure all members of
society to have their basic needs satisfied. If society
cannot afford to sustain their basic needs, such as
food, shelter, and health care, the economic system
falls into a slump.
 Criticisms
• A primary criticism for individuals who question the
free market economy is there is too much
government interaction which disallows for an
entirely free market.
• A pure free market will result in monopolies and
oligopolies instead of natural competition.
• The economic market will never be entirely free if
the government continues to bail out companies that
continually dominate the markets.
 Misconceptions

• There is also a misconception that a free

market refers to an unregulated market which
is entirely untrue.
• Another misconception is that taxes do not
affect output
 U.S. Market Economy Compared to the
rest of the World

• The United States economy has vast opportunity for

success and growth compared with many other
countries in the rest of the world.
• The free market allows for adjustments with social
demands, economic growth, and competition.
• Government should also continue to support the
middle class, and continue to invest in education to
create opportunities for all Americans.
Checks and Balances of the Free Market
Economy

• absolute power corrupts absolutely, this is why we

have to have a check and balance in a free market;
• The natural supply and demand concept is what
naturally checks and balances the market itself; as
well as all the competitors involved in that market.
• However government will steps in to regulate the
market in interest of the market economy and its
society.
 Planned/Socialist /Command Economic
System
• Features:-
In this type economic system the State:-
1. Control all economic activity
2. Make all decisions regarding economic
activity
3. Decides what goods are produced how much of
each good to produce and how much the people
should get.
 Example of Planned/Socialist /Command
Economic System

• Soviet Union ( composed of 15 countries)

dismantled their planned economic let 1990’s
• China starting changing it in the late 1990’s
• Cuba starting changing it few years ago
• North Korea Still using the command economic
system
 Advantage Planned/Socialist /Command
Economic System
• 1. The welfare of all citizens is the primary goal
• 2. Full employment of all available resources
• 3. Government possess the information to be able to
direct resources where they are most needed
• 4. Wasteful competition is avoided
• 5. there is no industrial unrest such as striking ,as the
government controls wages.
• 6. Greater emphasis on quality of life than on
quantity produced
 Disadvantages of Planned/Socialist
/Command Economic System
• 1. No freedom of choice for consumers or producers
• 2. System is too rigid to adjust when changes
occurs, can result in shortages
• 3. Lack of incentives for workers results in low
morale and low efficiency. Managers also are
not motivated.
• 4. There are too many officials and too much
unnecessary procedure and paperwork( red-
tape or bureaucracy)
 Disadvantages of Planned/Socialist
/Command Economic System (Cont.)

• 5. Conflits of interest can arise because what the

country needs may not be what the people want.
• 6. There is wastage of manpower because large
number of people are required for central
planning
 Mixed Economic System
• Features:-
• 1. Economic decision are taken by the price
Mechanism system and also by the state.
• 2. The private business sector operates along the
lines of the free market economy where the price
mechanism determines allocation of resources.
• 3. The aim of the private sector is to maximize
profits while the aim of the public sector is to
maximize social welfare
 Mixed Economic System ( Cont.)

• 4. The public sector produces goods and services

that the private sector is unable or unwilling to
produce, with a bureaucratic set up like the planned
economy
Advantage of Mixed Economic System
• 1. The State can intervene in areas of the economy
through the passing of laws to protect citizens form
unfair trading practices
• 2. Both the government and the private sector can
cooperate in offering certain services such as
transportation, Health care etc.
• 3. government can provide some incentives to the
private sector , in order to private sector can develop
and invest in the direction which the government
feels it will be beneficial to the economy.
 Disadvantages Mixed Economic
System
• 1. Too much government regulations may dampen
the free enterprise spirit
• 2. Some state owned industries are allowed to
operated inefficiently thus wasting resources.
• 3. Where government intervenes in the market by
setting maximum and minimum prices, this way
cause excess demand or supply which may be
difficult to regulate in the long run..
Disadvantages Mixed Economic System
(Cont.)
4. The government function as a guide in
economic activities of a country.
Government intervene by either
nationalizing or regulating policies of
industry
5. Since the private sector helps to answer
the economic questions, there can be the
creation of monopolies.
6. Inequitable distribution of wealth can
also arise.
 Mixed Economic System

• Decision makers in this economic system:-

1. A consumer is one who uses goods and
services to satisfy his/her wants. The goal of the
consumer is to maximize his/her satisfaction.
2. A firm is a producer of goods and
services. The goal of the firm is to
maximize profits.
 Mixed Economic System ( Cont.)

• Decision makers in this economic system:-

3. The government function as a guide in
economic activities of a country.
Government intervene by either nationalizing or
regulating policies of industry
 Comparison of Economic Systems
• Characteristics Traditional Econ.Syst.
• 1. Role of Goven. 1. No formal Gov. Feudal
• 2.Freedom of choice 2. Depends on Resour.
• 3. Ownership of Nat. Res. 3. Feudal Lords
• 4. Price determination 4. Barter was the manif.
• 5. Which sector answers 5. tradition & customes
• the basic econom.quest
 Comparison of Economic Systems
• Characteristics Free- Market Econ.Syst.
• 1. Role of Goven. 1. little or No role of Gov.
• 2.Freedom of choice 2. Consumer & producers
• 3. Ownership of Nat. Res. 3. Private sector
• 4. Price determination 4.Price mechan.deter.Price
• 5. Which sector answers 5. Private Sector
• the basic econom.quest
 Comparison of Economic Systems

• Characteristics Planned Econ. Syst.

• 1. Role of Goven. 1. Gover. Decides
• 2.Freedom of choice 2. No freedom of choice
• 3. Ownership of Nat. Res. 3. State/Public sector
• 4. Price determination 4.Gover. Sets Price
• 5. Which sector answers 5. State/ Public Sector
• the basic econom.quest
 Comparison of Economic Systems

• Characteristics Mixed Econ. Syst.

• 1. Role of Goven. 1. Gover. Regulates
• 2.Freedom of choice 2. Limit freedom of choice
• 3. Ownership of Nat. Res. 3. State/Private sector
• 4. Price determination 4.Price Mechanism
• 5. Which sector answers 5. State/ Private Sector
• the basic econom.quest