Economic System

Economic System

The system by which a country’s wealth is produced, distributed, exchanged and consumed is called as economic system. 

Traditional Economy:

An economic system in which economic decisions are made based on customs, beliefs, religion and habits.  This is the oldest economy in the world. This is also known as subsistence economy which means (self-surviving).

Features of traditional economy:

1)   Technology is not used in traditional economy.

2)   Surviving is important than saving.

3)   Barter system is medium of exchange.

4)   Old method of Farming hunting and gathering is there in traditional economy.

5)   Very less or no economic growth.

6)   Economic activities are usually concerned towards the family.

Barter system: Barter System is that system in which goods are exchanged for goods. Example: A loaf of bread in exchange of jam.

Market Economy:

 Market economy is one where people have considerable freedom to buy whatever they want and sell whatever they produce.

Other names for Market economy:

1)   Free Market Economy

2)   Capitalist Economy

3)   Free Enterprise Economy

4)   Open economy

Features of Market Economy:

1)   Private Property: Most of the business is owned and controlled by individual with intention to get profit. Example:  Private school, Private hospital etc.

2)   Freedom of choice: Each individual has freedom to buy whatever they want and sell whatever they produce.

3)   Self Interest: It means people can do what is best for them according to their interest. Example: producers maximize their profit, consumers maximize their satisfaction, and workers maximize their salary.

4)   Price Mechanism: Prices are decided by the Price mechanism i.e. changes in price according to demand and supply of the good/service.

5)   Profit Motive: All economic activities are done for getting profit.

6)   Limited role of government: Government has little role to play in the functioning of the economy. Government has mainly two work to do

a)   Defence: to protect people from other countries

b)   Police force: to maintain law and order.

7)   Competition: Competition provides many varieties of goods at lower cost to customer.

Advantages of Market Economy:

1)   The market provides a wide variety of goods and services to people.

2)   Private sector takes decisions quickly and responds quickly to people's wants.

3)   It encourages innovative work (the use of new and better methods and machines to produce goods and services)

4)   It brings in foreign investment in the country.

5)   It increases people’s skill interest and ability to do work.

Disadvantages of Market Economy:

1)  The free market may encourage the consumption of harmful goods and it spoils people’s health.

2)  All goods and services will not be supplied to all people.

3)  External cost will be ignored by most of the people who produce goods.

4)  Rich becomes richer and poor becomes poorer

5)  Exploitation of natural resources for getting profit.

6)  Businesses in the market economy will only employ those factors of production which will be profitable and thus we may find a lot of unemployment as more machines and less labour will be used to cut cost.

 

Command Economy:

Command economy is one where the factors of production are owned and managed by the government. Thus the government decides what to produce, how much to produce and for whom to produce.

Other names for command economy:

1)   Planned economy

2)   Centrally planned economy

3)   Command and controlled economy

4)   Socialist economy

Features of command economy:

1)   Public property: All economic resources are owned and controlled by the government.

2)   Planned Production: Government plan what goods and services to be produced. For this it requires large number of government planners.

3)   Prices control: Price is controlled by government & it cannot be changed.

4)   Social Welfare Motive: The government does not think about profit. Its main motive is people’s welfare.

5)   Resource Allocation: Resources are allocated according to central plan.

Advantages of Command Economy:

1)   There is less inequality of wealth. For example: Teacher, Principal, Supervisors will have same salary

2)   As government itself is planning what to produce, how to produce and for whom to produce. there will be no competition between firms for the sake of profit and  National resources will be conserved

3)   Government will not produce harmful goods like alcohol etc. considering the health of people in country.

4)   More public (defense, light house, street lights, and clean air) and merit goods (school, hospital, public libraries and work training program etc.) will be provided to people.

5)   Low level of unemployment as government will plan to employ all people.

Disadvantages of Command Economy:

1)   Consumers don’t have freedom to choose goods and services because only those goods and services which are decided by government will be produced.

2)   Consumers don’t have variety of goods and services.

3)   As government planning may take long time there is wastage of time and money communicating instruction from government.

4)   As the firms are not profit motive they may become inefficient.

5)   There are no incentives for innovative work.

 

Mixed Economy:

It is an economy where the economy has good features of ‘Market Economy’ and good features of ‘Command Economy’.

Mixed Economy = Good Features of Market Economy + Good features of Command Economy

Features of Mixed Economy:

1)   Resources are owned by individual and also by government i.e. it has private property as well as public property.

2)   People have freedom of choice but they cannot use harmful goods.

3)   Prices can be changed but price control will be one of the aims of government.

4)   There is a control of government on private firms.

Advantages of Mixed Economy:

1)   Consumers and producers have choice to buy and sell the product of their choice.

2)   Government has the right to stop production of demerit (harmful) goods for society.

3)   Compared to market economy there will be less income inequality due to role played by government in an economy.

4)   Social cost can be reduced with the help of government plans.

5)   Producers can increase price and earn profit until a certain level where government may interfere.

Disadvantage of Mixed Economy:

1)  Citizens have to pay tax.