Set of inter-related production and consumption activities that aid in

Economy
determining how scarce resources are allocated
Definitions
Organizational frameworkwhich tries to solve the basic economic
Economic system
problems

Posses factors of Production

Sell the factors to earn income (Rent, wages, interests, profit)

Households
Pay taxes and receive subsidies

Invest their savings

Private
Business firms
Public
Sectors of an Economy

Maintain law and order Safety, facilities and public goods

Government
Impose taxes Provide subsidies

Foreign sector Engage in import and export trade

Labour organisations
Other sectors
NGO's

Traditions

Traditional economic system Self sufficient

Bartar system

Private resource ownership

Free enterprise and choice

Competitions and Self centered

Profit maximisation and sovereignity

High demand Prices rise Signal to expand production

Signalling function
No demand Prices fall Signal to eliminate the supply

High prices Acts as incentives to raise output

Incentive function
Price mechanism
Lower prices Acts as an incentive to increase the demand

Resources are scarce Demand exceeds supply Ration scarce resources Discourage demand

Rationing function
Greater the scarcity, Higher price, the more the resources are rationed

Encourage innovation Achievement indicator Investment attraction

Economic Systems
Provide incentives Increases risk bearing capacity Ensures future capital

Market Economic System / Capitalism Functions of Profit

Measurement of Performance Encourages productivity and efficiency

Problems of profit Inequality Short-termism Market failure Monopoly

How Market economies solve the basic economic problems?

Competition leads to efficiency and productivity

Adjusts to people's wants

More innovation
Advantages

Variety of goods

Types of Economic Systems
Criteria
Fast economic growth and freedom for producers and consumers
- Mechanism for Decision making
- Ownership of Resources
- nature of incentives

Inefficiency in resource allocation

Failures in providing public and merit goods

Disadvantages Pollution and Firm dominance

Inequality in income distribution

Wastage of Resources and production of demerit goods

How does the CPE solve the Basic Economic Problems?

Society welfare is the priority

Reduction of Wastage

Advantages No competition

Reduction of inequal distribution of income

Fair income
Planned Economic System/ Command

Government failures leads to Economics inefficiency

No speedy development

Disadvantages Freedom for choice is limited

Bureaucracy

Political dictatorship

Combines both Capitalism and Command economy

Both parties have ownership to resources

Market forces prevail with interference of the governemnt

Taxes on high income earners

Mixed Econoomic System

Subsidies and transfers granted to low income earners

Pricing policies

How does the Mixed Economic System solve the Basic Economic
problems?