Chapter 2 Economic systems

1. Chapter 2Economic systems

2. Lecture Plan • Scarcity and economic systems • The market economic system • The command economic system • The mixed economy • Market systems versus command systems • Advantages and disadvantages

3. Economic Systems • The way a nation is organised to respond to the problem of scarcity • Different economic systems use different methods to answer the Basic Economic Questions, that is: • What to produce • How to produce • For whom to produce (cont.)

4. Economic Systems (cont.) Unlimited Needs and Wants Scarce Productive Resources Relative Scarcity Basic Economic Questions The Need for an Economic System

5. Types of Economic Systems • The market economy • The command economy • The mixed economy

6. 1. Market Economies • Also called Capitalist or Private Enterprise systems Features are: • Productive resources are predominantly owned by the private sector • Economic decision making is decentralised, i.e. the level of government intervention is low • Economic motivation is self interest (utility or profit)

7. Market Systems: Advantages and Disadvantages • Advantages of market systems • Economic freedom • Minimum state intervention maximises individual welfare • Efficiencies (in production, distribution and consumption) • Disadvantages of market systems • Unequal distribution of income and wealth • Exploitation of the economically poorer and less powerful • Disadvantaged groups (e.g. migrants, long-term unemployed) are unfairly treated

8. 2. Command Economies • Also called socialist or centrally planned economies Features are: • Productive resources are owned predominantly by the state or government sector • Economic decision making is undertaken by a central authority or government • Collective welfare (i.e. goods/services) distributed to benefit the state as a whole, rather than individuals • Allocation by non-price mechanisms • Equity is valued

9. Command Economies: Advantages and Disadvantages • Advantages of command systems • Abundant provision of collective goods (e.g. education, health, public transport and recreational facilities) • The government provides employment security • Equal opportunity and equity • Disadvantages of command systems • Inefficiencies and waste of human resources • Cumbersome decision making

10. 3. The Mixed Economy • All modern economies are said to be a mixture of • market forces and • government intervention • In the past, major examples of centrally planned economies were the former USSR and China. These now have allowed levels of market forces to operate

11. Economies in Transition The ‘All-Out’ Approach • Examples: Poland, East Germany, Russia, Czech republic • Rapid price and trade liberalisation • immediate opening of markets • privatisation of most state-owned enterprises • reform of tax, legal and financial system (cont.)

12. Economies in Transition (cont.) The Phased approach • Example: China • 1978—opening the doors to joint ventures • Gradual price liberalisation • Agricultural reform • Reform of state-run enterprises • Relaxed restrictions on ‘non-state’ industrial firms (e.g. collectives, local government)

13. Convergence Theory • Many centrally planned economies have adopted elements of market economies and many capitalist economies continue to use aspects of government intervention