Chapter 1.

Economics – A General Introduction 21

 Learning Objectives:

By the end of this lesson, the students will be able to:

- Define economic sýtems

- Identify different types of economic systems

- explain examples of different types of economic systems

An economic system is a means by which societies or governments

organize and distribute available resources, services, and goods across a
geographic region or country.

Economic systems regulate factors of production, including capital, labor,

phisical resources, and entrepreneurs. An economic system
encompasses many institutions, agencies, and other entities.

TYPES OF ECONOMIC SYSTEMS: There are many economies around

the world. Each has its own distinguishing characteristics, although they all
share some basic features. Each economy functions based on a unique set
of conditions and assumptions. Economic systems can be caterogized into
four main types: traditional economies, free market economies, command
economies, and mixed economies.

I. TRADITIONAL ECONOMY

The traditional economic system isbbased on goods, services, and work,

all of which follow certain established trends. It relies a lot on people, nad
there is very little division of labor or specialization. In essence, the
traditional economy is very basic and the most ancient of the four types.

Some parts of the world still function with a traditional economic system.
It is commonly found in rural settings in second- and third – world nations,
 Chapter 1. Economics – A General Introduction 22

where economic activities are predominatly farming or other traditional

incoming-generating activities.

There are ussually very few resources to share in communities with

traditional economic systems. Either few resources occur naturally in the
region or access to them is restricted in some way. Thus, the traditional
system, unlike the other three, lacks the potential to generate a surplus.
Neverthless, precisely because of its primitive nature, the traitional
economic system is highly sustainable. In addition, due to its small output,
there is very little wastage compared to the other three systems.

I. FREE MẢKET ECONOMY

There is very little government interference in the free market economic

system. The government exercises little control over resources, and it does
not interfere with important segments of the economy. Instead, regulation
comes from the people and the relationship between supply and
monopolies.

The free market economic system is mostly theoretical. That is to say, a

pure free market system does not exist. Why? Well, all economic systems
are subjects to some kind of interference from a central authority. For
instance, most governments enact laws that regulate fair trade and
monopolies.

 A free market economy’s greatest downside is that it allows private

entities to amass a lot of economic power, particularly who own resources
of great value. The distribution of resources is not quibtable because those
who succeed economically control most of them.

III. COMMAND ECONOMY

In a command system, there is a dominant, centralized authority –

usually the government – that control a significant portion of the economic
structure. Also knowwn as a planned system,the command economic
 Chapter 1. Economics – A General Introduction 23

system is common in communist societies when production decisions are

very preserve of the government.

If an economy enjoys access to many rersources, chances are that it

may lean towards a command eonomic structure. In such a case, the
government comes in and exercises control over the resources. Ideally,
centrlized control covers valuable resources such as gold or oil. The peple
regulate other les important sectors of the economy, such as argiculture.

 In theory, the command system works very well as long as the central
authority exercises control with the general pupulation’s interests in mind.
However, that rarely seems to be the case. Command economies are rigid
compared to other systems. They react slowly to change because power is
centralized. That makes them vulnerale to economic crises or
emergencies, as they cannot quickly adjust to changed conditions.

IV. MIXED ECONOMY

 Mixed systems combine the characteristics of the free market and

command economic systems. For this reason, mixed systems are also
known as dual systems. Sometimes the term is used to describe a market
system under strict regulatory control.

 Many countries in the West follow a mixed system. Most industries are
private, while the rest, comprised primarily of public services, are under the
control of the government.

 Mixed systerm are the norm globally. Supposedly, a mixed sytem

combines the best features of the free market and command systems.
However, practically speaking, mixed economies face the challenge of
finding the right balance between free markets and government control.
Governments tend to exert much more control than its necessary.

CRITICAL THINKING QUESTION: What does the government decide for

you when you live in a communist country?
 Chapter 1. Economics – A General Introduction 24

V. SECTORS OF PRODUCTIION IN THE ECONOMY

 The main sectors of the sconomy are:

- Primary sector – extraction of raw materials – minings, fishing and

agriculture.

- Secondary/ Manufacturing sector – concerned with producing finished

goods, e.g. Construction sector, manufacturing and utilities, e.g. electricity.

- Teritary/ Service sector – concerned with offering intangible goods and

services to consumers. This includes retail, tourism, banking, entertainment
and I.T. services.

- Quaternary sector – knowledge economy, education, research and

development)

Figure 7. Sectors of the economy

 Chapter 1. Economics – A General Introduction 25

 The primary sector is sometimes known as the extraction sector –

because it involves taking raw materials. These can be renewable
resources, such as fish, wool and wind power. Or it can be the use of non –
renewable resources, such as oil extraction, mining for coal.

In the 1920s, over one million people were emplyed in the UK coal industry.
It was a key part of the economy. However, improved technology and the
growth of other energy sources has seen a dramatic decline in this primary
sector industry.

In less developed economies, the primary sector will comprise the biggest
part of the economy. Typically as an economy develops, increased labor
productivity will enable workers to leave the agricultural sector and move to
other sectors, such as manufacturing and the service sector.

Figure 9. Primary sector

 Chapter 1. Economics – A General Introduction 26

Figure 8. The raw material – wool from sheep. Primary sector

 The secondary sector makes and diistributes finished goods.

The manufacturing industry takes raw materials and combines them to

produce a higher value added finished product. For example, raw sheep
wool can be spun to form a better quality wool. This wool can then be
threaded and knitted to produce a jumper that can be worn.

Initially, the manufacturing industry was based on labor – intensive ‘cottage

industry’ e.g. hand spinning. However, the development of improved
technology, such as spinning machines, enabled the growth of larger
factories. Benefiting from economies of scale, they were able to reduce the
cost of production and increase labor productivity. The higher labor
productivity also enabled higher wages and more income to spend on
goods and serices.

Examples of manufacturing sector:

 Small worshops producing pots, artisan production

 Mills producing textiles
 Factories producing steel, chemicals, plastic, car
 Chapter 1. Economics – A General Introduction 27

 Food production such as brewing plants, and food processing

 Oil refinery

Figure 9. The World Heritage Saltaire factor by the River Aire. Built by Sir Titus Salt. This was
a successful mill for producing ‘alpaca wool’

 The tertiary sector is concerned with the intangible aspect of offering

services to consumers and business. It involves retail of manufactured
goods. It also provide services, such as insurance and banking. In the
twentieth century, the service sector has grown due to improved labor
productivity and higher disposable income. More disposable income
enables more spending on ‘ lxury’ service items, such as tourism and
restaurants.

The main sectors of the service sector include:

 Retail industry
 Computer and I.T. sẻvices
 Restaurants and Cafes
 Transport – rail, bus, air, sea
 Communication
 Banking services
 Chapter 1. Economics – A General Introduction 28

 Pension services
 Food and beverage services
 Postal services

Figure 10. A café selling coffee is an example of the service sector. It is making use of raw
materials (primary sector) – coffee beans, and manufactured goods (cups and saucers and
coffee machine)

CRITICAL THINKING QUESTIONS: In Russia, the primary sector

accounts for 11% of all jobs, the secondary sector 29% and the tertiary
sector 60%. Draw a pie – chart to show these proportions.