ECONOMIC SYSTEMS

Assignment by: Fatima Amjad 0050 Elaf Anwar 0078 Sania Raza 0086

Introduction:

Economic systems are the means by which countries and governments distribute resources and trade goods and services. An economic system must define what to produce, how to produce it and for whom to produced it. They are used to control the five factors of production, including labor, capital, entrepreneurs, physical resources and information resources. Different economic systems view the use of these factors in different ways.

The world's economic systems fall into one of three main categories: market economy, command economy and mixed economy; however, there are unlimited variations of each type.

MARKET ECONOMY:

Market economy is also known as capitalism or the private enterprise system. The central thought of this system is that it should be the producers and consumers who decide how to utilise the resources. It is a system of society wide coordination of human activities, without central command. Thus, the market forces decide what to produce, how much to produce and for whom to produce. The efficient working of a free market economy requires that the producer firms must have incentives to work hard and produce goods and services at the lowest possible cost per unit of output. Market economies provide incentives to the firms and individuals by recognising and enforcing the property rights of the individuals and firms, to own the resources and goods and services produced by using them.

Features:

Property Rights: Property rights are social institutions that govern the ownership, use and disposal of resources, goods and services. There are three types of property which individuals and firms can privately own: real property which includes land, buildings, durable goods such as plant, capital equip­ment etc, financial property which includes shares and bonds, bank deposits, money kept at home and intellectual property, which represents the products of creative effort and includes books written, audio and video material, computer programmes. Besides, the owner is free to sell or dispose of his property in any way he likes. The two attributes of property rights, namely, the right of the owner to use the property as he likes and the right to sell it provide incentives to the owners to use their property efficiently.

Freedom of Private Enterprise: Freedom of enterprise means that everybody is free to engage in whatever economic activity he pleases. In other words, he is free to choose to work in any industry he likes or adopts any occupation or trade he desires. An individual or firm is free to engage in any economic activity he feels most desirable or profitable.

Profit and Prices: Profits are earned from undertaking the task of producing goods and services and introducing new products and new techniques of production. Profits earned by the firm depend on prices of goods and services pro­duced and cost incurred. In a perfectly competitive market firms are price takers that are they take price of a product or service as given. With a given price, firm’s profits will be larger, if cost per unit of output is smaller. Therefore, in order to maximise profits, firms try to minimise cost for producing a given level of output. Thus profits serve as incentive for the firm to produce efficiently. Prices of goods and services indicate how much money individu­als are prepared to pay for them. The goods and resources which are relatively more scarce will have higher prices in the market. On the other hands, the goods and resources which are relatively less scarce will have low market prices.

Competitive models: There are four competitive models in a market economy. Perfect competition is a theoretical market structure in which all the firms sell homogeneous (identical) products and are price takers. The prices are controlled by market forces and have small market share. The buyers in this market have complete information and there is freedom of entry and exit. Monopolistic competition is a market structure in which each firms make their own decisions about output, knowledge is widely spread between participants, there is freedom to enter on leave the market, the products are differentiated and firms are price takers. The firms are independent and said to be profit maximisers. Oligopoly is a market controlled by few firms. It is much like monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market. As a result they can greatly influence price and other market factors. Also there is barrier to entry and exit. Monopoly is the extreme case in capitalism. It’s a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. Monopoly is characterized by an absence of competition, which often results in high prices and inferior products. In a monopoly market, factors like government license, ownership of resources, copyright and patent and high starting cost make an entity a single seller of goods. All these factors restrict the entry of other sellers in the market.

Consumer Sovereignty: In a free market economy there is a freedom of choice for the consumers to buy goods and services which suit their tastes and preferences. In a market economy only those goods and ser­vices are produced if the firms producing and supplying them are able to sell them at a profit. Now, profits are made if goods or services produced are sold for more than what it costs to produce them. Therefore, firms cannot expect to make profits, if they do not make goods or services which are not in accordance with the preferences and demands of the consumers and also for which consumers are not willing to pay adequate price.


Advantages:

Harder working employees due to the threat of losing their job or being laid off because the product or service is not selling.
Friendly competition between companies will encourage efficiency among employees to lower costs for success.
Companies become creative in finding new products to sell or manufacture and less expensive ways to accomplish their goals.
As companies grow due to market economy, foreign investors will begin to take an interest and help expand.
Private companies take over activities and venues that were in the past public sector. This reduces the size, power and cost of state bureaucracies.
Production increases for the frivolities that will cost more money but people want. This is a classic example of supply and demand.
Social and technical skills needed to function within a market economy system are quickly learned as is the knowledge to succeed.
There is a larger variety of consumer goods available for a wide range of people ranging from middle-class to the very affluent.
Encourages people to step up and try their hand in the market economy. Encourages entrepreneurs to start up a business and sell merchandise or offer services at competitive rates.

Disadvantages:

The exploitation of workers is a large disadvantage because the working conditions and long hours for less pay and few benefits, if any. The large corporations have moved their production to countries where they can get cheap labor with few safety regulations for the workers.
Investment priorities and wealth becomes distorted. The wealthy keep getting wealthier and the public sector such as public education, transportation routes and public health does not get the needed funds to keep evolving and providing for the public’s needs.
Goods will be mass produced and therefore the cost will be driven lower. As a product becomes popular and overproduced, the manufacturers must unload the goods, even if that means lowering prices to where the general public can afford them.
Due to overproduction, industrial machinery will lay idle and therefore not producing a profit for the manufacturer. Until the prices drop the goods will remain unsold and people who cannot afford them have their needs unmet.
Unemployment rates go up due to the overproduction of goods. Workers are not needed to keep producing goods and therefore companies cannot afford to keep workers employed.
Having the market economy system will lead to periods of economic crises. The economy will stop growing when goods are overproduced and workers are then unemployed. The economic crisis will not end until the next item is founded that the wealthy just have to have. Then they cycle starts again.

Examples:

These countries are the examples of free market economy:

Hong Kong
Hong Kong achieved the top ranking in 2012 with a score of 89.9, out of a possible total of 100.
Hong Kong have a strong legal framework, especially its property rights and general support for the rule of law. It also commended Hong Kong for its low tolerance for corruption to support its regulatory efficiency.

Singapore
Singapore’s economy is 85.7% free. Virtually all commercial operations are performed with transparency and speed, and private enterprise has boomed. Inflation is low, and foreign investment is welcomed and given equal treatment. There are no tariffs. Singapore’s legal system is highly protective of private property.

Australia
Australia’s economy is 82.7% free. Its low inflation and low tariff rates buttress a globally competitive financial system. A strong rule of law protects property rights and tolerates virtually no corruption. Businesses enjoy considerable flexibility in licensing, regulation and employment practices.

United states
The economy of the United States is 82% free. The average tariff rate is low, although there are several non-tariff barriers. Financial markets are open to foreign competition and are the world’s most dynamic and modern. Corruption is low and the labor market is highly flexible.

New Zealand
New Zealand’s economy is 81.6% free. A globally competitive financial system based on market principles attracts many foreign banks, helped by low inflation and low tariff rates. A strong rule of law protects property rights, and New Zealand is the world’s second most corruption-free country.

United Kingdom
The United Kingdom’s economy is 81.6% free. The average tariff rate is low, although the government does implement distortionary European Union agricultural tariffs. Support for private enterprise is a world model, and the financial sector is modern and a historic world hub. The judiciary should be the envy of the world.

Ireland
Ireland’s economy is 81.3% free. Entrepreneurship is made easy by the light regulatory hand of government. Inflation is low, but Ireland’s monetary score suffers somewhat from distortionary EU agricultural subsidies. Property rights are well protected by an efficient, independent judiciary.


COMMAND ECONOMY:

Command economy is also known as centrally planned economy. An economic system in which economic decisions are made by the state or government rather than by the interaction between consumers and businesses. The government decides what goods will be produced, how they will be produced, and how resources are distributed and used. The government can determine the price of goods and services. In a centrally planned economy, it is assumed that the needs of the people are not met in a market economy and therefore the government needs to make the decisions.


Features:

Central economic plan: The government creates a central economic plan for all sectors and regions of the country. It starts with a five-year plan to set the overriding economic and societal goals.
The master plan is broken down into shorter-term plans to convert the goals into actionable objectives. 

Allocates all resources: The government allocates all resources according to the central plan. The goal is to use the nation's capital, labor and natural resources in the most efficient way possible. That eliminates unemployment by promising to use each person's skills and abilities to their highest capacity.

Production of all goods and services: The central plan sets the priorities for the production of all goods and services. These include quotas and price controls on all goods and services. Its goal is to supply enough food, housing, and other basics to meet the needs of everyone in the country. It has social priorities, such as mobilizing for war or generating robust economic growth.

Government owned monopoly businesses: The government owns the monopoly business in industries deemed essential to the goals of the economy. That usually includes finance, utilities, and automotive. There is no domestic competition in these industries.

Laws and regulations: The government creates laws, regulations, and directives to implement the central plan.

Advantages:

Resources are quickly and effectively mobilized on a large scale.
Industrial power is created and massive projects completed while attaining imperative social goals.
Individual self-gain is no longer the driving force of success among businesses. The greater good of the society is the focus of the economy. The society as a whole benefits from the success and not just a select few individuals.
This type of economy is able to transform the society to conform to the government’s vision for the country or society.
Command economies can prevent abuse of monopoly power.
Command economies can prevent mass unemployment.

Disadvantages:

The needs of the society are often ignored for the betterment of the economy. Workers are not given options on where they can be employed or where they can move.
The black market explodes in a command economy. Due to the governmental restrictions, good and services that are not offered in the command economy began being offered on the black market.
The amounts of goods being produced are not balanced. One item will be mass produced whereas another will not have enough to support the economic needs. The government entity that controls the economy has difficulty obtaining up-to-date information about the needs of the consumers. Many times rationing becomes a way of life within a command economy. Government agencies usually have poor information about what to produce.
Exporting goods becomes problematic because it is difficult for the controlling entity to determine which products and prices will be most successful within the global market.
Unable to respond to consumer preferences.
Threat to democracy and liberty. A command economy creates a very powerful government which limits individuals rights to pursue economic objectives. This invariably creates a climate where governments can extend their control into other areas of people’s lives.

Examples:

Cuba
Cuba is a good example of command economy. Although certain market reforms have been made in recent years, such as letting people become independent contractors (e.g. plumbers) as they can earn more going to consumers directly this way (before Cubans often waited years to get their toilet fixed, which often ended up just being a replacement). The government has also discovered this income can be taxed, so generating more revenue.

Iran
Since the Revolution in 1979 when major businesses were nationalized, though recently they have begun to privatize them.

North Korea
A known basket case, is currently the only entirely planned economy (excluding the black market which they all have).

Saudi Arabia
Their oil industry, the source of most national wealth, is state-owned and run.

MIXED ECONOMY:

An economic system that features characteristics of both capitalism and command economy. A mixed economic system allows a level of private economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. This type of economic system is less efficient than capitalism, but more efficient than command economy. There are elements of both public and private enterprise.
In reality most economies are mixed, with varying degrees of state intervention Mixed economies start from the basis of allowing private enterprise to run most business. Then the governments intervene in certain areas of the economy, such as regulation, and spending money on public services.
The mixed economy may be classified in two categories:

Capitalistic Mixed Economy:
In this type of economy, ownership of various factors of production remains under private control. Government does not interfere in any manner. The main responsibility of the government in this system is to ensure rapid economic growth without allowing concentration of economic power in the few hands.

Socialistic Mixed Economy:
Under this system, means of production are in the hands of state. The forces of demand and supply are used for basic economic decisions. However, whenever and wherever demand is necessary, government takes actions so that basic idea of economic growth is not hampere

Features:

Co-existence of Private and Public Sector: Under this system there is co-existence of public and private sectors. In public sector, industries like defence, power, energy, basic industries etc., are set up. On the other hand, in private sector all the consumer goods industries, agriculture, small-scale industries are developed. The government encourages both the sectors to develop simultaneously.

Personal freedom: Under mixed economy, there is full freedom of choice of occupation, although consumer does not get complete liberty but at the same time government can regulate prices in public interest through public distribution system.

Private property allowed: In mixed economy, private property is allowed. However, here it must be remembered that there must be equal distribution of wealth and income. It must be ensured that the profit and property may not concentrate in a few pockets.

Economic planning: In a mixed economy, government always tries to promote economic development of the country. For this purpose, economic planning is adopted. Thus, economic planning is very essential under this system.

Price mechanism: Under this system, price mechanism and regulated price operate simultaneously. In consumer goods industries price mechanism is generally followed. However, at the time of big shortages or during national emergencies prices are controlled and public distribution system has to be made effective.

Profit motive and social welfare: In mixed economy system, there are both profit motive like capitalism and social welfare as in socialist economy.

Check on economic inequalities: In this system, government takes several measures to reduce the gap between rich and poor through progressive taxation on income and wealth. The subsidies are given to the poor people and also job opportunities are provided to them. Other steps like concessions, old age pension, free medical facilities and free education are also taken to improve the standard of poor people. Hence, all these help to reduce economic inequalities.

Control of monopoly power: Under this system, government takes huge initiatives to control monopoly practices among the private entrepreneurs through effective legislative measures. Besides, government can also fake over these services in the public interest.

Advantages:

Mixed economies help lessen the amount of government control and government regulation that is prevalent in command economies. There is equal ditribution of control.
Most industries and businesses can now be left to the private firms. These private firms are more likely to be efficient compared to firms controlled by the government as they have profit incentive for cutting costs and being innovative

With business left to private enterprises, the government can focus on the regulation of the market to improve economic stability and the country as a whole. When correctly implemented, the government’s policy decisions may seem counter intuitive to the interests of businesses at first, but will actually provide greater stability in the long ru
.
This type of economic system is known for allowing government regulations in areas where market failure is experienced. This means that a region will have more space to develop and grow to attain economic success

Disadvantages:

One of the biggest issues that come with a mixed economy is finding a balance between wealth equality and market freedom. This is seen by a number of socialist and progressive thinkers. This problem can lead to lack of social mobility and wide-scale poverty.
Identifying the government’s exact role in private enterprises is sometimes a guessing game that results to unfair practices exhibited on both sides. According to Libertarians, the government tends to manage an economy poorly, and as such, any of its involvements is considered wrong

Free market economists also criticize a mixed economy, as it allows excessive intervention of the government. Most governments are invariably influenced by short-term political factors

More state intervention in the economy, of course, requires greater investment from the government, which largely comes from tax revenues. An argument against such intervention is that the more it is, the more the need for people to be taxed. This will lead to negative consequences, such as decreased motivation in work, as employees see a large proportion of their earnings going to the taxation agency

Under this system, both the sectors are ineffective in nature. The private sector does not get full freedom, hence it becomes ineffective. This leads to ineffectiveness among the public sector. In true sense, both sectors are not only competitive but also complementary in nature

There are no such comprehensive planning in mixed economy. As a result, a large sector of the economy remains outside the control of the government

Examples:

All the economies are mixed. Some of economy is managed by the government, the rest left to private firms and individuals These are some of them with share of government spending as a % of GDP:

Iceland (57%)
Sweden (52%)
France (52.8%)
United Kingdom 47.3%
United States 38.9
Russia 34.1
China – 20% of GDP
Hong Kong 18.6%

However, there are different degrees of state intervention. European economies such as Sweden and France have a generous level of social security spending. Education and health care are free at the point of US. In the US, government spending as a share of GDP is lower, but health care has to be paid for.
As economies develop, the government often take a higher share of total spending. Developed countries, such as in Western Europe, often choose to provide state welfare support, and greater government regulation of the environment and business environment.