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Economic SystemsThere are three major types of economic systems, each with their own drawbacks and benefits: the Market Economy, the Planned Economy and the Mixed Economy. An economic system is loosely defined as a country’s plan for its services, goods produced, and the exact way in which its economic plan is carried out. Market Economy In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development. A market can be defined as any economic activity designed to satisfy the needs of society. On one hand we have consumers who demand goods. On the other hand we have sellers who aim to satisfy demand by providing the required goods and services while at the same time, making a profit. In other words, the market can be viewed as the area where individual decisions about buying and selling interact. On one side we have purchasers or consumers who wish to buy single consumer goods, consumer durables and consumer services. On the other side we have producers willing to supply these commodities who therefore must buy factors of production and produce services. The needs or wants of consumers are unlimited but resources to satisfy them are finite. Because of this dilemma, economic goods are considered to be scarce in relation to the demand for them. In other words, consumers must choose between the alternative goods available. The collective action of all consumers determines the market demand. Sellers, too, are faced with the problem of scarce resources and must exercise choice. Their collective action determines the market supply. The interaction of the two market forces of supply and demand determines the market price for each commodity or service. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors. The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. Such a system is very efficient. The economy adjusts automatically to meet the changing demand. No planners have to be employed, firms tend to be highly competitive, new advanced products and low prices are good ways to increase sales and profits. Not surprisingly there are also problems. Some goods would be underpurchased if the government did not provide free or subsidized supplies. Healthcare, education, defence and policing are impossible to supply individually in response to consumer spending. Production alters swiftly to meet the changing demand, which can result in higher unemployment rates and cause social problems. Furthermore, safety standards concerning products, services and working conditions require large-scale government intervention to pass laws to protect consumers and workers. Finally, at certain times firms tend to cut back on production and the development of new ideas, which can lead to a recession. Planned Economy A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present in a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. On the other hand, a planned economy aims at using all available resources for developing production instead of allocating the resources for advertising or marketing. Mixed economy. Command and market economies both have significant faults. An intermediate system has developed, known as mixed economies. A mixed economy contains elements of both market and planned economies. At one extreme we have a command economy which does not allow individuals to make economic decisions. At the other extreme we have a free market where individuals and businesses exercise considerable economic freedom of choice without any government restrictions. Between these two extremes lies a mixed economy. In mixed economies some resources are controlled by the government while others are used in response to the demand of the consumers. Technically, all economies of the world are mixed. Some countries are nearer to command economies, while others are closer to free market economies. The aim of mixed economies is to avoid the disadvantages of both systems while enjoying the benefits that they both offer. So, in a mixed economy the government and the private sector interact in solving economic problems. The state controls the share of the output through taxation and transfer payments and intervenes to supply essential items such as healthcare, education, policing, and defence, while private firms produce cars, furniture, electronic items, etc.
Date: 2015-01-02; view: 2874
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