Economic Systems
How are resources allocated?
Topic Plan
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•
•
•
•
Scarcity
The Market economic system
The Command economic system
The mixed economy
Market Vs Command systems
Economic Systems
• The way a nation is organised to
respond to the problem of scarcity
• Different economic systems use
different methods to answer the
Basic Economic Questions :
– 1. What to produce
– 2. How to produce
– 3. For whom to produce
Unlimited Needs
and Wants
Scarce Productive
Resources
Relative Scarcity
Basic Economic Questions
The Need for an Economic System
Types of Economic Systems
• The Market economy
• The Command economy
• The Mixed economy
1. Market Economies
• Also called capitalist or private
enterprise systems.
Features are:
• Productive resources are mainly owned
by private individuals.
Features of market economies
(cont.)
• Economic decision making is
decentralised (i.e. decisions are made
by individuals ) and the level of
government intervention is low.
• Economic motivation is self interest
(e.g profit motive)
Features of market economies
(cont.)
• Price is major criterion to allocate
goods and resource ( price
system/mechanism ).
• Efficiency is valued or rewarded.
2. Command Economies
• Also called socialist or centrally
planned economies.
Features are:
• Productive resources are owned mainly
by the state or the government.
Features of command economies
(cont.)
• Economic decision making is made
by a central authority or the
government
• Goods/services are distributed to
benefit the state as a whole, rather
than individuals
Features of command economies
(cont.)
• Non-price mechanisms such as
queuing, rationing coupons are used
to allocate goods among people.
• Equity is valued.
3. The Mixed Economy
• All modern economies are said to be a
mixture of - market forces ( price
system ) and
- government intervention
• In the past, major examples of centrally
planned economies were the former
USSR and China. These now have
allowed levels of market forces to operate
Economies in Transition
The
ll-Out?Approach
• Examples: Poland, East Germany,
Russia, Czech republic
• Rapid price and trade liberalisation
– immediate opening of markets
– privatisation of most state owned
enterprises
– reform of tax, legal and financial system
Economies in Transition
The Phased approach
• Example: China
• 1978 Opening the doors to joint ventures
• gradual price liberalisation
• Agricultural reform
• Reform of state run enterprises
• Relaxed restrictions on on-state?industrial
firms (eg collectives, local government)
Market Vs Command Systems
• Advantages of market systems
– eg: economic freedom, efficiency etc
• Disadvantages of market systems
– eg: unequal distribution of income and wealth
• Advantages of command systems
– eg: Equity ( in theory )
• Disadvantages of command systems
– eg: inefficiencies and waste
The End
?McGraw-Hill Book Company Australia, 1999
PPS t/a Economics for Business 2/e
2-16