Unit 2.

1: Economic Systems
Ref: Complete Economics for Cambridge IGCSE & O Level by Moynihan, D. & Titley, B.

Outline

S What is an economy?

S Resource allocation
S Economic systems S Market S Planned S Mixed S Comparative Analysis

What is an economy?

S Where the production, exchange and consumption of

goods and services take place.

S Production is influenced by goals- profit, social- and

consumer demand.
S An exchange takes place in a market.

Resource Allocation

S Scarce resources and capital

S What, how and for whom to produce?- Economic System

S Involves public and private sectors and consumers.

Economic Systems: Market Economy

S All decisions made by the private sector.

S There are no purely market economy as the government

usually has some role in it. Closest example may be the U.S

Economic Systems: Planned Economy

S Most decisions made by the public sector.

S No incentive to compete for sales and keep costs low.

S Examples include Russia and China after the 2nd World

War until the 1980s.

Market Systems: Mixed Economy

S Decisions split between private and public sectors.

S Most countries follow this system.

S For example in Singapore the Ministry of Trade and

Industry overlooks most matters related to businesses through laws and regulations.
S Companies are however given much freedom to act

according to market demand and supply.

Comparative Analysis

Market

Planned

Mixed

All decisions made by private sector.

Most decisions made by public sector.

Decisions split between public and private sectors.

Government intervention can distort allocation.

Markets might fail to produce worthwhile g&s. There might be wasteful or harmful activities. There might be wasteful activities as consumer demand is not necessarily considered.

Comparative Analysis:
Market A wide variety of g&s Planned Only what the govt wants is produced Central planning and bureaucracy means slow response or even customer choice ignored Mixed Laws & regulations can increase production costs and reduce supply Public sector may be inefficient and produce poor quality g&s

Quick response to changing wants and spending patterns.

Profit motivates product development and more efficient production

No taxes

No incentive to compete for sales or to keep costs down

Strong govt presence through taxes, laws, restrictions and Taxes can distort market price signals and reduce work incentives

Comparative Analysis:

Market

Planned

Mixed

Only profitable goods are produced.

Only customers who are able to pay for goods get them.

Only what the govt wants are produced

Everyone can get the same product

Provision of public goods

Provision of public services

Resources will be employed only if it is profitable

If it is profitable, harmful goods may be produced

Everyone can be employed as wanted

The govt decides whatever goods are produced

Public sector jobs and welfare

Laws against harmful goods

Comparative Analysis:

Market

Planned

Mixed

Harmful effects may be ignored

There may be domination of market supply

Depends on the govt

The govt dominates the market

Laws and regulations that protect

Government can regulate. Spending may be for noneconomic reasons

Other References

S http://www.s-cool.co.uk/category/subjects/a-

level/economics/free-market-v-command-economies
S http://www.slideshare.net/mxcastro/economic-systems-

5098911
S http://www.youtube.com/watch?v=d8ivuSUfTg4