Types of Economic Systems

HELLO STUDENTS. This week we will focus on the types of economic systems. The specific objective related to this topic is that the candidate should be able to state the types of economic systems and identify their institutional characteristics and goals. In looking at each economic system, we will see how each goes about answering the three basic economic questions that we looked at last week. Before we go into all of this, however, we need to define the term economic system and consider some of the common goals of the governments of these systems.

WHAT IS AN ECONOMIC SYSTEM?

This describes the ways in which a country allocates or distributes its scarce resources amongst alternative and competing wants. In other words, it is the fixed programme or plan used by a nation to utilise its resources.

Despite the characteristic differences in the various types of economic system, their governments are concerned with the same issues. Some of these issues include:

* The allocation of scarce resources amongst alternative uses.

* The distribution of national income amongst the country's inhabitants.

* The control of inflation.

* Economic growth.

THE FREE MARKET ECONOMY (LAISSEZ-FAIRE OR CAPITALIST ECONOMY)

In the planned economy, freedom of choice is limited to consumer deciding how to spend their money. They are free to buy whatever goods and services are offered for sale.

* Private individuals and firms own the majority of productive resources and property, hence they are the ones that allocate or distribute the resources they own. The question of what to produce is decided on in response to consumer demand and the price for which they can sell their goods and services.

* The question of how to produce bears in mind the motive of the producers. Their aim is to maximise profits. Therefore, in producing, they choose methods that will minimise costs whilst maximising profits.

* The goods and services produced are for those who demand them and are willing and able to pay the price being asked for them. Price is mainly determined by the market forces of demand and supply. In this type of system, there is freedom of choice. Private individuals and businesses are free to obtain economic resources and to produce and sell in a market of its choice. Consumers are free to purchase with their limited income those goods and services they feel will satisfy their wants.

* Another feature of this type of economic system is that most of the social services such as hospitals, schools, roads and public transport are produced in a haphazard manner.

In the free market economy, the goods and services produced are for those who demand them and are willing and able to pay the price being asked for them.

* There being little or no government enterprises means in the free market economy, governments provide mainly defence and security and ensure that the laws of the country are upheld and that the rights of people are not infringed on. Examples of countries which practise the free market economy are the United States of America and Hong Kong.

THE PLANNED ECONOMY (COMMAND, STATE PLANNED OR COLLECTIVIST ECONOMY)

* Ownership of the scarce productive resources is by the state or government. Therefore, the state or the government allocates these resources.

* The state or the government produces the basic goods and services that will satisfy the needs of people and that will result in the maximisation of social welfare, rather than in the maximisation of profits.

* The government through its planning committee decides on how to combine the various factors of production to produce in the most efficient way and at low costs so they can sell at prices affordable to consumers.

* The goods and services produced are for the country at large, not just for those who can afford to pay for them. A wide cross-section of persons benefit from goods and services produced in government-owned operations.

* The state or the government sets prices and determines the levels of wages in firms and industries; they also dictate production targets and the distribution of incomes and wealth.

* Freedom of choice is limited to consumer deciding how to spend their money. They are free to buy whatever goods and services are offered for sale.

* Examples of countries which practise this type of economic system are Cuba and China.

THE MIXED ECONOMY

* The dominant feature of this system is the existence of two definite sectors ­ the private sector and the public sector. Each sector owns some amount of the scarce productive resources and will therefore be involved in allocating what they own.

* The private sector will produce what allows them to maximise profits. These tend to be luxury type goods demanded by people who can afford to buy them. Examples of these goods are furniture and appliances.

* The public sector produces for social welfare to satisfy the entire society, thus they tend to produce utilities such as water, telephone services and transportation. How each sector produces and their motives for production also differ. However, the sectors do not conflict with each other, rather, they complement or go hand in hand with each other.

* Government sometimes exercises control in the mixed economy, by intervention, for example, by nationalisation, or by regulations, in the interest of the citizens. Most Caribbean countries adopt this economic system.

Your assignment this week is to list the advantages and disadvantages of each economic system. You can obtain the information from your Principles of Business texts and from this lesson.