Economic System

Economic System
is a set of
mechanisms and
institutions that
resolve the
_______,
______, and
________
questions

Types of Economic Systems
The market economy

The command economy

The mixed economy



Characteristics of Capitalism
Price Mechanism
It means the free operation of demand
and supply forces without any
government intervention.
All economic processes such as
consumption, production, savings,
investment will according to price
mechanism (let people do as they
choose without government
intervention) and is labelled as invisible
hand by Adam Smith
Private Ownership
Private ownership of resources.
Every individual has a right to
acquire private ownership of
resources.
Private individuals can
accumulate property and use it
as they choose.
Example : If Amin wants to buy
a bungalow, he can purchase
the property if he has sufficient
money. There is no restriction
on the number of properties
Amin can own.

Role of Interest
Individuals are free to
make choices.
Customers would maximize
their satisfaction.
Businessmen are
motivated by profits. They
produce in order to
maximize profits.

Consumer is said to be the king.
Consumers decisions would
influence the producers
decisions of what to
produce.
Producers have to produce
goods and services to meet
customers tastes and
preferences, otherwise they
will not be able to sell what
they produce.


Presence of Competition
Competition is healthy as it
encourages research and
development.
Invention and innovation are
made possible with science and
technology. With the existence
of such elements, economic
growth can be achieved.
Producers will keep improving
their techniques of production
in order to compete with other
firms.
Limited government intervention
Limited government
intervention in the
economic activities of the
economy.
All economic activities are
carried out by the private
sector.
For example : television
stations and telephone
services.
Advantages : Economic Freedom
Economic freedom means the right
to earn property.
It also means a freedom of
enterprise and a choice of
occupations.
This will lead to the sourcing of the
countrys manpower from different
sectors.
Production according to the need of
consumers
Producers produce goods and services that
consumers want and this maximizes the
needs and satisfaction of consumers.
Efficient utilization of resources
Competition creates efficiency in production.
Quality goods are produced at lower cost.
Consumers get the highest quality goods at
a lower cost since production techniques are
more efficient.
Variety of Consumer Goods
Competition takes place with regard to all
aspects of the product such as shape,
quality, colour, design and packaging.
Therefore, consumers will enjoy a wide
variety of the same product.
There is also a variety of consumer goods
because of freedom of enterprise, resulting
in greater production.
Enhanced trade, business, research
and development
Producers are always on the lookout for
new innovations to compete with other
producers.
This will lead to a rapid expansion and an
increase in employment and income.
Innovators enjoy the benefits of their
research through copyright and patents.
Automatic incentives
Capitalism provides encouragement to
efficient producers.

Efficient producers will benefit from the
price mechanism as compared to inefficient
producers.
Flaws in Capitalism

No central authority to protect property
rights, and enforce contracts.
Some producers may try to monopolize
by eliminating the competition.
So-called public goods, such as national
defense, will not be produced by private
firms because they cannot prevent non-
payers from enjoying the benefits of
public goods.
Disadvantages : Unequal distribution of
income and wealth

Since there is no government
intervention in the market, the
system of private property
widens the gap between the
rich and the poor.
Those who have wealth can
obtain resources and start
businesses while the poor only
have their labor to offer.
In other words, the rich get
richer and the poor get poorer.
Inflation and high unemployment
rate
Since it is governed by the invisible hand,
business fluctuations cause high
unemployment rates during depression.
Lack of social welfare
In free economy, social welfare is
ignored.
Owners do not provide any
pension, social security or accident
benefits to employees.
There is also insufficient provision
of public facilities such as schools,
hospitals and etc.
Undesirable social effects such as
theft and crime tend to be high.
Misallocation of resources
A producers objective is to maximize profit
and he will therefore, only produce products
which give higher profits.
This will lead to the production of luxury
goods (for rich people), resulting in a
surplus and a lack of production of goods
for the poor.
Social Costs
Workers may face social problems such as
health problems arising from the polluted
environment caused by an improper
disposal of factory wastes.
The intention of most producers is to
increase private profit and this often leads
to a neglect in the welfare of their workers.
Mao Zedong
Vladimir Ilyich Lenin
Characteristics of Pure Command
System
Public ownership of resources
All the resources are owned and operated
by the state or the government in the
interest of society as a whole.
This is to ensure equal opportunity of all
citizens regardless of their income.
Public ownership also aims to fully utilize
the countrys resources and maximize social
welfare.
Central Planning
The central authority is responsible for
making economic decisions for society.
The authority plans and allocates resources
between current consumption and
investment for the future.
Price mechanism of lesser
importance
Socialism gives less importance to market
forces.
Prices are fixed by the government and not
determined by demand and supply.
Private profits are not allowed and public
interest is emphasized in the command
economy.
Command Economies:
Advantages
Abundant provision of collective goods (e.g.
education, health, public transport and
recreational facilities)

Production according to basic needs
Production is directed at producing the basic
needs of the people such as food, clothing
and building materials.
It is not determined by the purchasing
power of the rich in society.
The phenomenon of the rich getting richer
and the poor getting poorer does not exist
in the socialist economy.
Equal distribution of income and
wealth
This system provides
equal opportunities for
all citizens in earning an
income.
No serious unemployment or
inflation
The unemployment rate and inflation are
usually taken care of by the government to
ensure economic stability in the country.
Social Welfare
The government will provide all citizens of
the country with full social security benefits
such as pension, accident benefits and
wastage of resources do not exist in a
socialism system.
Flaws of Command System
Running an economy is so complicated that
some resources are used inefficiently.
Since nobody owns resources, people have less
incentive to employ them in their highest
valued use.
Central plans may reflect more the preferences
of central planners than those of society.
Since government is responsible for all
production, the variety of products tends to be
more limited than in a market economy.
Each individual has less personal freedom in
making economic choices.
Absence of competition
Since there are limited private enterprises,
less research and development activities are
carried out.
This results in low quality products since
there is no competition.
Mixed Economy
This is an economic system which combines
both capitalism and socialism to solve basic
economic problems.
A mixed economy is an economy in which
both the public and private sectors play a
role in the economy.
Public and Private Ownership of
resources
Private enterprises conduct business freely.

Government encourages the private sector
by providing them with infrastructure and
facilities.
Price mechanism and economic
plans in making economic decisions
The price mechanism is used to price both
goods and services.
However commodities such as sugar,oil and
rice are declared as controlled items in
Malaysia and the government fixes their
prices.
Most of the mixed economies accept
economic planning as an instrument of
economic growth.
Command Economy

1. What? One person or a group of people (often
government officials) decide what products are
needed. In most cases, their decisions are dictated
by what they believe is important.

2. How? Since the government owns all the means
of production in a command economy, the
government runs all the businesses. It decides how
goods and services will be produced. It employs all
workers and controls all employment opportunities.

3. For whom? The government decides who will get
what is produced. In principle, all the people share
equally in the nation's wealth. In that way,
everyone's basic needs are met. There is much
security in such a system-but at the cost of
individual freedom.

Government helps to control income
inequality
In most mixed economies, the government
controls income inequality through income
taxes and welfare payments.
The government helps to narrow the income
gap between rich and the poor.
Government intervention in the
economy
The government will not intervene in the economy
except for particular industries.
In a mixed economy, the government uses
legislation for unsafe goods categorized as illegal
products such as military items.
The government also uses direct provision such as
education, defense and health to increase the
standard of living.
The government caters projects that are
considered as unprofitable for the private sector.
Example : low cost housing projects.
Government control of monopolies
Monopolists are single players in an
industry.
They have complete, sole control over the
price of goods or services.
In order to avoid customers being exploited
by monopolists, the government will
regulate the power of monopolists.
Market Economy

1.What? Consumers decide what should be produced in a market
economy. They do this through the purchases they make in the
marketplace. Only those items that satisfy consumer's needs and
wants are purchased, so only those products succeed. Products that do
not satisfy consumer's needs and wants are not purchased and so fail.

2. How? How products will be produced is left up to businesses in a
market economy. In such an economy, businesses must be
competitive. They must produce quality products at lower prices than
their competitors. To do that, they must try to find the most efficient
way to use available resources when producing their goods and
services.

3. For Whom? In a market econony, the people who have more
money are able to buy more goods and services. To obtain money,
people are motivated to work and invest the money they make.