Sunday, May 29, 2011

ECONOMIC SYSTEM

ECONOMIC SYSTEM
Economic System:
The system which decides what to produce, how to produce and for whom to produce is known as economic system.
Traditional Economic System
 It is also known as subsistence economic system
 It is based on some customs and tradition
 They are producing all the goods and services to satisfy their own wants and needs
 The important occupation is farming, fishing and hunting
Market Economic System
 All the resources are owned and controlled by the private individuals and firms is known as market economic system
 In this system price decided by the price mechanism or market mechanism
 Government plays very limited role like defence, maintain law and order etc
 The aim of this system to maximize the profit.
Features
 Private property: All the resources are owned and controlled by the private individuals and firms
 Freedom of choice: Consumers, producers and workers have the freedom choose what they want
 Self interest: It encourages the people to do what is best for them. Consumers, producers and workers will try to maximize their benefits.
 The price mechanism: In this system, the prices of goods and services are fixed by the forces of demand supply.
 Limited role of government: Government has only limited economic functions like secure the defence of the country and to maintain law and order.
Advantages of market economic system
 Freedom of choice: Consumers, producers, workers have the freedom to choose what they want.
 Price mechanism: Automatic operation of price mechanism will decide the price through demand and supply
 No shortages and surpluses: The price system makes sure that shortages and surpluses of goods and services do not last for long.
 Less civil servants are needed: Need only less civil servants to take decision
 Financial incentive: People have a financial incentive to be productive.
 Efficiency: Efficiency will be improved through competition.
Disadvantages of market economic system
 Public goods are not supplied: It would not be supplied the public goods like street lighting, street cleaning, police, defence etc. It would not be easy to charge price for these goods and services.
 Merit goods are not supplied: Market economy cannot supply the merit goods like education, health services etc
 Maximization of profits: It try to maximize profit. They may pay little attention to pollution, working condition, worker’s pay etc.
 Inequalities in the distribution of income and wealth: Some people will be rich and some people will be poor under this system.
 External cost: It will create some cost to third parties by the economic activities of others.
Mixed Economic System
 In this system all the resources are owned and controlled by private individuals and government.
 It combines the advantages of command and market economic system.
Features
 Features of command and market economic system
 Price mechanism and planning authority
 Freedom of choice and national plan.
 Profit motive and social welfare.
 Private sector and public sector
Advantages
 Government can control market failure.
 Government can reduce the inequalities in income by imposing high tax on rich and give social benefits to poor
 Government can control harmful products like alcohol, cigarettes etc
 Government can take over loss making private industries from creating unemployment.
 Consumers have more freedom of choice
 Private sector’s aim is profit maximization, so they will introduce advancement in technology
 It will helps to an increase in economic growth and standard of living.

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