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TYPES OF ECONOMIC SYSTEMS

 

See the difference between traditional, command and market economies and express your opinion as to which one is, in your view, the most efficient.

 

Every society has worked out its own way to respond to questions of what, how and who. These economic systems, as they are called, generally fall into one of the three main categories: traditional, command and market economies.

The traditional economy. As the name implies, the answers to the what, how and who questions are decided by tradition in these economies. Traditional economic systems are usually found in the more remote areas of the world. Such systems may characterize isolated tribes or groups, or even entire economies. Typically, in a traditional economy, most of the people live in rural areas and engage in agriculture or other basic activities, such as fishing or hunting. The goods and services in such a system tend to be those that have been produced for many years or even generations in a way they have always been. In short, the questions of what and how the traditional society produces are determined by very slowly changing traditions.

Who gets to keep what is produced in such an economy? Since there is little produced, there is little to go around. Most individuals live near a subsistence level: they have enough to sustain them but little more than that. In some years, when the harvest is poor, some will not be able to subsist and will either leave the society or die. In better years, when the yield is high, there may be more than enough to allow subsistence. When such a surplus exists, it will be distributed traditionally. For example, the bulk of the product might go to a tribal chief or large landowner, while the balance is distributed according to custom.

The command economy. Countries, such as Cuba, North Korea, China are examples of command economies. Groups of high-level technicians, made up of engineers, economists, computer experts and industry specialists known as "planners" advise political leaders how develop and implement a plan for the entire economy. Essentially it is the planners who decide what goods and services are to be produced. If they want ship production expanded and mining operation cut, they issue the orders to do so. If more food is needed, the planners might direct tractor production to be increased or fertilizers to be imported. The same plans might also encourage labour to remain on the farms and order that transportation and shortage facilities be made available to move and hold farm production.

How are goods produced in a command economy? The planners decide which products will be made, who will receive the goods and services. By setting the wage rate for everyone, as well as interest rate, profits and rents the planners directly answer the question: who is in a position to get goods and services.

The market economy. A market or free enterprise economy is one in which the decisions of many individual buyers and sellers interact to determine the answers to what, how and who questions. In addition to buyers and sellers, there are several other essential elements in a market economy. One of these is private property. By "private property" we mean the right of individuals and business firms to own the means of production. Although markets exist in traditional and command economies, all major means of production (companies, farms, factories, etc.) are usually publicly owned. That is, they are owned by groups of people or by the government. In a market economy the means of production are owned by private individuals. Private ownership gives people the incentive to use their property to produce things that will sell and earn them profit.



This desire to earn profit is a second ingredient in a market economy. Often referred to as the profit motive, it provides the fuel that drives sellers to produce the things that buyers want and at a price they are willing to pay. The profit motive also gives sellers the incentive to produce at the lowest possible cost. Why? Because lower cost enables them to increase their profit margins, the difference between cost and selling price, or reduce prices to undersell the competition, or both.

Economists often compare markets to polling booths. However, unlike the booths in which people vote, markets provide a kind of economic polling booth for buyers to cast their votes (in the form of purchases) for the goods and services they want. Producers who interpret the votes correctly by producing the things the buyers demand can earn profits. Those who interpret the voting incorrectly, producing too much or too little, or charging a price that is too high or too low, do not earn profits. In fact, they often lose money. Consumer votes can be a matter of life and death to business in a market economy, government plays a relatively minor part in this model.

There are, however, no "pure" market economies in the world to­day. While we can say that market accounts for most economic decisions in this country, government has been playing a certain role also. This blend of market forces and government participation has led economists to describe the system of free enterprise as mixed economies.

 

Answer the following questions:

1. Where can traditional economies be found?

2. Can a traditional economy bring high living standards to its people?

3. Are there many command economies left in the world nowadays?

4. How are economic decisions made in command economies?

5. What is the most essential element of a market economy?

6. What is the main drive and purpose of goods and services producers in a market economy?

7. What is the similarity and difference between markets and polling booths?

8. What is the role of the government in a market economy?

 


Date: 2015-04-20; view: 1855


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