Introduction to Economies

by

Dr. K. S.Narayana
Assistant Professor
Department of Mechanical Engineering

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 Economy……..what is it?
Economy is termed to be “Rules of Household” in Greek.
House, means may be an individual house or a society or a state or a country.

Necessity of Economy….
Economy is required for utilizing the available resource in a limited and effective way
for satisfying the needs.

What should Economy focus on ?

Any Economy should be capable of answer the basic three questions like:
 Requirement (can be also be termed as “Consumption” or “what is to be
produced”).

 Production (can also be termed as “how to produce”)

 Distribution (can also be termed as “Who will get what is produced”)

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How to Measure Economy strength of a Nation?
Any Economy strength can be measured with its index's like “Gross Domestic
Products (GDP) and “Gross National Product (GNP)”.
Mother Nation Boundary

Productions
by Citizens
Production
Productions in Foreign
Production by
by Citizens Nations
by Citizens Foreigners
in Mother
Land

A Nations GNP
A Nations GDP

How to Measure Economy

Income of a Nation? Productions
Productions
by Citizens
Any Economy Income of a nation can be by Citizens in Foreign
in Mother Nations
measured with its index's like “Gross Nation Land

Income (GNI)”.

A Nations GNI 3
Introduction to Economies…
Types of Economies

Command/ Mixed
Planned Economy Free Market Economy
Economy
Command Economy (Centrally-Planned Economy or Communist economy)
Command economies has close association with communist
regimes in Russia, China, Eastern Europe, Cuba, Libya, Iran,
North Korea, Saudi Arabia and Burma etc.
A group of people (like Council, Legislature) or a supreme
controls all major sectors of the economy and formulates all
decisions about the use of resources and the distribution of
output. They decide what should be produced and direct lower-
level enterprises to produce those goods in accordance with
national and social objectives.
Advantages: 1. Guarantee equal standards of living for everyone. 2. Less crime and poverty.
3. In efficiency, it is hard to beat.
Disadvantages: 1. Minimal Choices (The council dictates the job in which you work & the prices of
goods and services) 2. Fewer Choice of Items (i.e. There is little individual freedom). 3. No
incentive to produce for better product. 4. Shortages are common because of poorly run
factories and farms
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Capitalist (Market Economy or Free Market Economy) Economy
In a market economy, consumers and businesses decide what they want to
produce and purchase in the marketplace. They make these decisions by “voting
with their dollars.” Producers decide what to produce given the demand they see in
the marketplace.
In a pure market economy, also known as a laissez-faire economy (from the
French “allow to do”), the government plays a very limited role. The government
does not direct, and may even lack the power to direct, the private sector to
produce certain goods and services. E.g.: USA etc.

• Resources are owned and controlled by individuals

• Individual freedom is considered very important
• Economic decisions are made by the basic principles of supply and demand
• Profit is the motive for increasing work rather than quotas
• There is competition among businesses
• Spontaneous feedback
•Group control through interaction of self interested individuals
• Adam Smith’s "invisible hand"

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Mixed Economy A mixed economy includes a combination of private and government control.
i.e. a mixture of capitalism and socialism. E.g.: Australia, India etc.

1. A mixed economy combines elements of both the planned and the market
economies in one cohesive system. This means that certain features from both
market and planned economic systems are taken to form this type of economy.
2. The government and the business entities control the economic activities of that
country and decision-making of the country.
3. Most effective economy for providing goods and services
4. Protects consumers and workers from unfair policies.

Disadvantages: 1. Monopoly (i.e. no control on price increasing) 2. Non-Exclusive use of public

goods. 3. Externalities like pollution, destruction of resources etc. 4. Market Failure and
Government Failures may take place.

Remedies for Market and government Failures:

1. Use of taxes and subsidy schemes to bring private costs & benefits into a line with social costs &
benefits
2. Assigning taxes against negative externalities
3. Subsidize producers of positive externalities.