UNIT 2

ECONOMIC SYSTEMS
 OBJECTIVES

 UPON COMPLETION OF THIS UNIT YOU WILL BE ABLE TO

 DESCRIBE THE MAIN DIFFERENCES BETWEEN THE
MARKET SYSTEM, THE COMMAND SYSTEM AND THE
MIXED SYSTEM;
 IDENTIFY NAMIBIA’S CURRENT ECONOMIC SYSTEM;
 DESCRIBE THE CONTRIBUTIONS OF ADAM SMITH, KARL
MARX AND JOHN MAYNARD KEYNES TO ECONOMIC
SCIENCE AND,
 IDENTIFY THE FOUR SECTORS OF THE ECONOMY
 ECONOMIC SYSTEMS

• Economic systems are the means by which countries

and governments distribute resources and trade goods
and services. They are used to control the factors of
production. Different economic systems view the use
of these factors in different ways.
 WHY DO ECONOMIC SYSTEMS EXIST

SCARCITY
• THERE ARE NEVER ENOUGH RESOURCES
• SOCIETY MUST FIND WAYS TO DIVIDE WHAT IT HAS BASED ON ITS NEEDS

COUNTRIES NEED TO DETERMINE

• WHAT TO PRODUCE
• HOW MUCH TO PRODUCE
• FOR WHOM TO PRODUCE
HOW A COUNTRY ANSWERS THESE QUESTION DETERMINES ITS ECONOMIC SYSTEM
 A) MARKET ECONOMY

• A market economy is the opposite of a command economy. In a market economy, people decide on their
own how to utilize the factors of production. They can choose from whom they buy, for whom they work for,
and what businesses they own and operate. If you want to invest your own capital or be an entrepreneur and
start your own company, you're free to do so. Buyers and sellers are brought together in markets.

• Individuals are motivated by profit or self-interest.

• The fundamental economic problem of what, how and for whom to produce is solved by the market
mechanism of supply and demand.

• A market economy, also known as a capitalistic or free market economy, relies on capitalism, free
enterprise, and freedom of choice.
 ADVANTAGES OF A MARKET ECONOMY

Markets allocate resources and for that reason a market system is more
effective in the allocation of resources and the distribution of goods and
services than any other system.
Consumers use ‘money votes’ to dictate to producers, through the market,
what to produce.
Businesses are motivated by profits and respond quickly to changes in
consumer preferences.
Individuals have economic freedom: the freedom of consumption,
production or occupation, the freedom to invest or save and the freedom of
private ownership.
Under a market system there are more technological innovations than under
other systems.
 DISADVANTAGES OF A MARKET ECONOMY

The system is based on ‘ability to pay’ and not needs

Public and merit goods such as law and order, defence,
health and education services may be under-provided due to
market failure.
Demand and supply determines employment and high
unemployment rates are possible.
There is an unequal distribution of income and wealth.
 COMMAND ECONOMY

• A command economy is one in which the government decides how the factors of production
are used. For example, the government determines who owns the businesses, who buys and
sells to whom, and who makes the ultimate decisions regarding businesses, including who
works for them. 

• Communism is a primary example of a command economy in that the government makes all
business decisions and handles all factors of production. In a communist country, the
government decides if you're going to college and chooses your field of study; they can also
designate you as a laborer. In this type of economic system, you'd have very few free choices.
 B) COMMAND ECONOMY

WHAT TO PRODUCE?
In a command or centrally planned economic system the government owns all the
productive resources as well as the businesses and decides what the local people will
produce and sell.

HOW TO PRODUCE?
Government decides how much to produce

FOR WHOM TO PRODUCE

Government decides who gets what
 ADVANTAGES OF A COMMAND ECONOMY

A government planning office decides how to allocate the resources. It estimates the
types of products individuals may want and decides on the distribution of finished
products. By doing this, they avoid wasteful competition.

There may be a more equal distribution of income as the state controls all the factors of
production.

It is possible to control inflation. If shortages are experienced, there may be queues at
shops or rationing of goods rather than price increases.
 DISADVANTAGES OF A COMMAND ECONOMY

There is no economic freedom.

It is difficult to balance demand and supply because there are no
markets.
Without a profit motive it is difficult for businesses to be
productive and efficient.
A huge bureaucracy is required to implement a system of central
planning.
Consumer preferences and needs are not taken into consideration.
This system was widely practised in Cuba and North Korea
 C) MIXED ECONOMY

WHAT TO PRODUCE?
In a mixed economic system, the market is allowed to operate, that means most production decisions take
place in the market between buyers and sellers and businesses decide what to produce based on supply
and demand and incentive for profit. Government will intervene where the market fails and provide things
like law and order, education and health services.

HOW TO PRODUCE?
Businesses decide how much to produce, but the government regulates some industries.

FOR WHOM TO PRODUCE

Producers will produce the goods that buyers want, as long as they can pay for the goods. Consumers,
Government will produce the same things as the market, but for different consumers, usually for those
who cannot afford to pay the market prices.
 ADVANTAGES OF A MIXED ECONOMY

Monetary and fiscal policy can be used to stabilise the

economy.
The community experience the benefits of private sector
activities such as efficiency and innovation.
The community also experience the benefits of the
government’s participation in the economy such as the
provision of public and merit goods.
 DISADVANTAGES OF A MIXED ECONOMY

Private and public sector activities can duplicate goods but it

can also leave gaps such as a lack of goods or services.
Control measures by the government such as fiscal policy, can
be ineffective because of delays to implement the policies.
 CLASS ACTIVITY

• State which economic system Namibia uses,

support your answer
 2. THE ORIGIN OF THE ECONOMIC SYSTEMS

There are three famous economists who made

important contributions to economic science and the
development of the various systems namely:
1. Adam Smith (1723 – 1790) /Classical theory
2. Karl Marx (1818 – 1883) / Marxist theory
3. John Maynard Keynes (1883 – 1947) / Keneysian
theory
 1. ADAM SMITH (1723 – 1790)

 Studied at Oxford- became a professor at the University of Glasgow.

 In his first book, "The Theory of Moral Sentiments," Smith proposed the idea of an invisible hand—the tendency of free
markets to regulate themselves by means of competition, supply and demand, and self-interest.
 1776 he published a second book with the title An enquiry into the nature and causes of the wealth of nations.
 Thus, he is regarded as the father of the market system and capitalism.
 During the first decades of the 20th century the Classical School (followers of Adam Smith) was the most important school
of thought.
 These economists believed in free markets without any government intervention.
 They believed that the market mechanism works in the same way at microeconomic level and at macroeconomic level, for
instance, the economy will always move towards full employment.
 They further assumed that production, which creates supply, also creates sufficient demand since people spend their
income.
 The classical theory was widely accepted until the Great Depression that lasted from 1929 to 1939.
 2. KARL MARX (1818 – 1883)

 Karl Marx best known critic of the market economy.

 1848 he published his first book The communist manifesto in collaboration with his close friend Friedrich
Engels.
 His major work, however, was Das Kapital. He published the first volume of this book in 1867 and two other
volumes were published after his death by Engels.
 Marx’s books had the most impact in the political sphere.
 He was against the exploitation of the working classes by capitalists and he predicted that at some point the
working classes would overthrow the capitalist exploiters.
 There were revolutions in the 20th century as a result of his ideas. Unfortunately some of these revolutions
occurred in poor countries and the results were often very disappointing.
 In western societies governments stepped in to stop the worst abuses and revolutions never occurred.
 Since the end of the 20th century most economies are based on the market system.
 3. JOHN MAYNARD KEYNES (1883 – 1946)
 John Maynard Keynes helped to lay the foundation of the mixed economy as we know it today.
 He was a son of a famous political economist, a gifted man and his occupations included business man, publisher,
teacher and economist. O
 He wrote many books, but his most important contribution to economic science was a book titled The general theory
of employment, interest and money that he published in 1936.
 This book laid the foundation of macroeconomic theory.
 The Great Depression showed that the economy does not return automatically to a level of full
employment.
 The continued unemployment of the Great Depression convinced Keynes that there was a need to
focus on demand side of the economy.
 He argued that the level of output and employment is determined by aggregate demand (expenditure)
and not aggregate supply.
 He justified government intervention in the economy by saying that government expenditure should
be increased if the other expenditure components are inadequate to maintain production and
employment at a satisfactory level.
 Marx predicted the collapse of the market system; Keynes probably saved it from this collapse.
 4. THE FOUR SECTORS OF THE
ECONOMY

The four main participants in the economy are the household sector, the
business sector, the government sector and the foreign sector.
• Households
Household is an economic unit of one or more persons living under one
roof that has a source of income and spends it.
Also known as consumers because they consume goods and services to
satisfy their needs.
They sell their labour and use the income they earn to buy consumer
goods and services.
When consumers spend money on goods and services, we refer to it as
consumption expenditures (C). Households represent the demand for
goods and services.
 THE FOUR SECTORS OF THE ECONOMY
(CONT….
• The business sector
Represent the supply side of the product market and employ factors of
production to produce the goods and services that they sell to other businesses,
the government and households. They all want to make profits.
The expenditure by businesses on new buildings and inventories is referred to as
investment expenditure (I).
The government sector
It is a function of the government to provide public and merit goods that the
private sector cannot handle, such as defence, health and education.
Public goods are consumed collectively such as national defence, law and order and street lights.
Merit goods are under-provided by the market, such as health and education services.
The government receives revenues from businesses and households in the form of various direct
and indirect taxes. These revenues are used to cover the government’s expenditure (G).
 THE FOUR SECTORS OF THE ECONOMY (CONT….
The foreign sector
No country can exist in isolation and economic welfare and growth often
depend on a country’s ability to export to other countries and to import
consumer goods, capital goods and technical know-how from other countries.
Goods produced in Namibia and sold in other countries are called exports (X)
while goods produced in other countries and sold in Namibia are called imports
(M).
Net exports are exports minus imports.
We can summarise the components of total spending by using the
following equation: GDP = C + I + G + (X-M)
 CLASS ACTIVITY 1

• State wether the items below are C, I, GX OR M

1. The government employs more teachers in public schools
2. Pick n pay opens a new store in Katutura
3. A student gets a haircut from a self employed hairdresser
4. Namibia buys computers from the USA
5. Spain buys fish from Namibia
 SOLUTION: CLASS ACTIVITY 1

• 1–G
• 2–I
• 3–C
• 4–M
• 5–X
 HOME ASSIGNMENT

• Tounderstand the three economic systems

practically, mention 5 countries under each
economic system.
• Indicate one or two features common in each of the
three economic systems
• Discuss your answers with your peers
 KEYWORDS
• Economic system: A set of economic institutions by which an economy is organised.
• Market economy: An economy that allocates resources through the forces of demand and
supply with prices being determined on the market.
• Command Economy: An economy where the government makes the decisions about the
production and distribution of goods.
• Mixed economy: An economy that contains features of both market and command economic
systems.
• Economic freedom: Economic decisions and choices are left to the individual.
• Resource allocation: The distribution of resources in the economy.
• Distribution of income: The way income is divided among the members of society.