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Economic systems (important for paper 1 and paper 2)
Thursday, July 30, 2020 9:38 AM
Definition: It is the system determining the allocation and ownership of scarce resources.
Allocation: Who will decide what to produce, how to produce and for whom to produce (Government (Public) or private
sector)
Ownership: who will own resources (Government (Public) or private sector)
There are three economic systems:
1. Command / planned economic system: In command economic system, Most resources are owned and allocated by public
(Government) sector. There is no or little role of private sector in the ownership and allocation of resources. Although
there is no pure command economic system exists in the world but North Koreas is considered to be closest to command
economy as 95% resources in North Korea are owned and allocated by the Government.
1. Market / capitalist economic system: In this economic system, most resources are owned and allocated by private
sector. There is no or little role of Government in the ownership and allocation of resources. Although there is no
pure market economic system but Countries like UK, France, USA Germany etc. are considered as closer to command
economic system.
2. Mixed economic system: In mixed economic system, Resources are owned and allocated by both private and public
sectors.
France, UK
Pakistan
N. Korea
Market economic system china
Command economic system
Privatization vs nationalization
Privatization: Process in which state owned firms are sold to private sector
Nationalization: When private firms are taken over / purchased by the Government.
Characteristics of a Command Economy
1. The government creates a central economic plan. The five-year plan sets economic and societal goals for every sector
and region of the country. Shorter-term plans convert the goals into actionable objectives.
2. The government allocates all resources according to the central plan. It tries to use the nation's capital, labor, and natural
resources in the most efficient way possible. It promises to use each person's skills and abilities to their highest capacity.
It seeks to eliminate unemployment.
3. The central plan sets the priorities for the production of all goods and services. That includes quotas and price controls.
Its goal is to supply enough food, housing, and other basics to meet the needs of everyone in the country. It also
sets national priorities. These include mobilizing for war or generating robust economic growth.
4. The government owns monopoly businesses. These are in industries deemed essential to the goals of the economy.
That includes finance, utilities, and automotive. There is no domestic competition in these sectors.
5. The government creates laws, regulations, and directives to enforce the central plan. Businesses follow the plan's
production and hiring targets. They can't respond on their own to free-market forces
Advantages:
• Can manipulate large amounts of resources for large projects without lawsuits or environmental regulatory issues.
• An entire society can be transformed to conform to the government's vision, from nationalizing companies to placing workers
in new jobs after a governmental skill assessment.
• Income equality among people (As Government owns all the production units. No individual earns profit. Salaries are paid to people
working for the Government
• Welfare is maximized as Government main priority is to provide basic necessities to people.
• No discrimination as every one gets essential goods and services equally.
Disadvantages:
1. Societal needs might be ignored.
In a command economy, the needs of the society are often ignored for its betterment. For workers, they will
not be given a choice on where they can move or where they can work.
2. Freedom is restricted.
This type of economy normally tied to communism, which means that it also puts full control in the hands of
the government alone and takes away the freedom of the people. Citizens cannot choose their career paths
based on their interests and skills and interests, but rather based on what the authority forces them to do.
All work is aligned with needs at a time, and the public do not have the full freedom of choice. Due to this
downside of a command economy, people would mostly become discontented.
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3. Innovative developments might be hindered.
While a free market do encourage innovation and change, a command economy does otherwise. Since the
government in power is controlling the market, innovation is not a priority or not encouraged at all. This is
due to the fact that this economic system controls all aspects of production and does not allow people to
make it better. This would lead to a workforce that is not that motivated to create higher-quality services or
products.
4. No competition is offered.
Market competition is a primary force of improvement, but it is not found in a command economy. After all,
the government is the one owning all the industries. Plus, it does not encourage competition, and actually, it
even tries to eliminate it. You would not certainly see the benefits of competition in countries implementing
this economic system.
5. Black markets would explode.
Because the government put restrictions on many products and services, such offerings may not be
available. Consequently, they will be offered on the black market.
6. There might emerge some export problems.
Because it is difficult for the government in control to determine which products and prices will perform well
on the international market, exportation can become problematic.
7. Unbalanced amounts of goods would be experienced.
It is difficult for the government to obtain updated information about consumer needs, so rationing is a way
of life in most cases. After all, some items are mass produced, while others are simply not enough to
support economic needs.
8. The authority might misplace incentives.
Take note that the central government monitors and regulates the supply and prices, rather than planners
and other market forces, and decides on the products and services that are going to be produced and
distributed. This would result to rewards not reaching to the individuals that deserve them.
9. Coordination can be difficult or even impossible.
Because there are no planners who coordinate economic decisions on production, consumption and trade
for the entire country, efficient coordination is deemed impossible. Demand and supply can even be
mismatched, and products can even fall on a shortage. Other issues are imbalance among food,
transportation facilities and electronic devices.
Syllabus for August assessment:
Chapter 1: Basic economic concepts
• Basic economic problem
• Factors of production
• Opportunity cost
• Sectors of production
• Production possibility curve
• Public good vs private good
• Economic systems.
Market economic system:
Features:
Private Property
Most goods and services are privately-owned. The owners can make legally binding contracts to buy, sell, or lease their
property. Their assets give them the right to profit from ownership. There are some assets U.S. law excludes. Since
1865, for example, you cannot legally buy and sell human beings.3
Freedom of Choice
Owners are free to produce, sell, and purchase goods and services in a competitive market. They only have two
constraints. First is the price at which they are willing to buy or sell. Second is the amount of capital they have.
Motive of Self-Interest
Everyone sells their wares to the highest bidder while negotiating the lowest price for their purchases. Although the
reason is selfish, it benefits the economy over the long run. This auction system sets prices for goods and services that
reflect their market value. It gives an accurate picture of supply and demand at any given moment.
Competition
The force of competitive pressure keeps prices low. It also ensures that society provides goods and services most
efficiently. As soon as demand increases for a particular item, prices rise thanks to the law of demand. Competitors see
they can enhance their profit by producing it, adding to supply. That lowers prices to a level where only the best
competitors remain. This competitive pressure also applies to workers and consumers. Employees vie with each other
for the highest-paying jobs. Buyers compete for the best product at the lowest price.
System of Markets and Prices
A market economy relies on an efficient market in which to sell goods and services. That's where all buyers and sellers
have equal access to the same information. Price changes are pure reflections of the laws of supply and demand. There
are five determinants of demand: product price, buyer's income, prices of related goods, consumer taste, buyer's
expectations.4
Limited Government
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The role of government is to ensure that the markets are open and working. For example, it is in charge of national
defense to protect the markets. It also makes sure that everyone has equal access to the markets. The
government penalizes monopolies that restrict competition. It makes sure no one is manipulating the markets and that
everyone has equal access to information
Advantages of a Market Economy
Since a market economy allows the free interplay of supply and demand, it ensures that the most desired goods and
services are produced. Consumers are willing to pay the highest price for the things they want the most. Businesses will
only create those things that return a profit.
Second, goods and services are produced in the most efficient way possible. The most productive companies will earn
more than less productive ones.
Third, it rewards innovation. Creative new products will meet the needs of consumers in better ways that existing goods
and services. These cutting-edge technologies will spread to other competitors so they, too, can be more profitable. This
sharing of knowledge illustrates why Silicon Valley is America's innovative advantage.
Fourth, the most successful businesses invest in other top-notch companies. That gives them a leg up and leads to
increased quality of production.1
Disadvantages of a Market Economy
1. wealth gets directed into what will earn the largest profit and not into what most people really need (so public health, public
education, receive little attention);
2. Worsening exploitation of workers, since the harder, faster, and longer people work—just as the less they get paid—the more
profit is earned by their employer (with this incentive and driven by the competition, employers are forever finding new ways
to intensify exploitation);
3. Overproduction of goods, since workers as a class are never paid enough to buy back, in their role as consumers, the ever
growing amount of goods that they produce (in the era of automation, computerization and robotization, the gap between
what workers produce—and can produce—and what their low wage allows them to consume has increased enormously);
4. Unused industrial capacity (the mountain of unsold goods has resulted in a large percentage of machinery of all kinds lying
idle, while many pressing needs—but needs that the people who have them can't pay for);
5. Growing unemployment (machines and raw materials are available, but using them to satisfy the needs of the people who
don't have the money to pay for what could be made would not make profits for those who own the machines and raw
materials—and in a market economy profits are what matters);
6. Growing social and economic inequality (the rich get richer and everyone else gets poorer, many absolutely and the rest in
relation to the rapidly growing wealth of the rich);
7. With such a gap between the rich and the poor, egalitarian social relations become impossible (people with a lot of money
begin to think of themselves as a better kind of human being and to view the poor with contempt, while the poor feel a mixture
of hatred, envy and queasy respect for the rich);
8. Those with the most money also begin to exercise a disproportional political influence, which they use to help themselves
make still more money;
9. Increase in corruption in all sectors of society, which further increases the power of those with a lot of money and puts those
without the money to bribe officials at a severe disadvantage;
10. Increase in all kinds of economic crimes, with people trying to acquire money illegally when legal means are not available
(and sometimes even when they are);
11. Reduced social benefits and welfare (since such benefits are financed at least in part by taxes, extended benefits generally
means reduced profits for the rich; furthermore, any social safety net makes workers less fearful of losing their jobs and
consequently less willing to do anything to keep them);
12. Worsening ecological degradation (since any effort to improve the quality of the air and of the water costs the owners of
industry money and reduces profits, our natural home becomes increasingly unlivable);
13. The same market experiences develop a set of anti-social attitudes and emotions (people become egotistical, concerned only
with themselves. "Me first", "anything for money", "winning in competition no matter what the human costs" become what
drives them in all areas of life. They also become very anxious and economically insecure, afraid of losing their job, their
home, their sale, etc.; and they worry about money all the time. In this situation, feelings as well as ideas of cooperation and
mutual concern are seriously weakened, where they don't disappear altogether, for in a market economy it is against one's
personal interest to cooperate with others);
Activity (5 minutes)
The problems (Disadvantages) of command and market economic systems can be resolved in mixed economic system. Discuss how?
1. Income disparity (wider gap between rich and poor), Reason: private producers tend to charge high prices (consumer exploitation) +
Labor exploitation+ Private sector ignores welfare. However in mixed economic Government charge high rate of taxes from rich people.
Tax revenue can be used by the Government to provide welfare to poor and to provide basic necessities at low price without any
discrimination.
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