Economic System

Economic Systems

The way a country’s resources are owned and the way that country takes decisions as to what to

produce, how much to produce and how to distribute what has been produced determine the type

of economic system that particular country practises.

1. MARKET ECONOMY (also called FREE ENTERPRISE ECONOMIES or CAPITALIST ECONOMY)

2. CENTRALLY – PLANNED or CONTROLLED ECONOMY

3. MIXED ECONOMY

1. MARKET ECONOMY in comparison to 2. PLANNED ECONOMY

e.g. USA, Japan

Private firms or individuals own means of

production. They make choices about:

o What to produce

o How to produce

o For whom to produce

- What to produce is answered by consumers

according their demand for goods & services

- How to produce is answered by the businessmen.

They will choose the production method,

which reduces their costs to reach the higher

profit.

- For whom to produce – firms produce goods

& services which consumers are willing and

able to buy.

Role of government

1. To pass laws to protect businessmen &

consumers

2. To issue money

3. To provide certain services – police

4. To prevent firms from dominating

The market and to restrict the power

Of trade unions

5. Repair and maintain state properties

Advantages:

- Goods and services go where they are most in

demand and free market responds quickly to

people’s wants + wide variety of G&S

- No need for and overriding authority to

determine allocation of goods&services

- Producers and consumers are free to make

changes to suit their aims

- Competition and the opportunity to make large

profits, greater efficiency, innovation

Disadvantages:

- It mis-allocates resources(to those with more $)

- It creates inequality of incomes

- It is not competent in providing certain

services

- It leads to inefficiency (market imperfection)

- It can encourage the consumption of harmful

goods - drugs

e.g. Cuba, China, former Soviet Union

State (government) owns all means of

production. Individuals are not...