02. ECONOMIC SYSTEMS – DEFINITIONS AND CHARACTERISTICS
- CAPITAL ECONOMY – SOCIALIST ECONOMY – MIXED ECONOMY
C. ECONOMIC SYSTEMS
i) Circular Flow of Goods and Money in an Economic System
Every economy is a system in which the production of many goods is organized to satisfy many wants of human beings. In an economic system, the two economic units namely households and enterprises are linked by a circular pattern of economic activities as illustrated in Figure 1.1.The choices and decisions of these two main units are the deriving forces of economic activity.
Money Payments for Consumer Goods and Services

Consumer
Goods
and
Services-Food,
Clothing etc (Output of Business Sector)
HOUSEHOLDS

1) Consume final goods and services produced by business sector.
2) Provide inputs (labour and

BUSINESSES OR ENTERPRISES

1) Provide goods and services to consumers.
2) Use resources (inputs) provided by households.

capital) to business firms.
Economic resources–land, labour and capital (inputs of business sector)
Money: Payments Goods, Services, Resources and Money Salaries, in a Simpleand Profit
Figure The flow of for Resources-Rent, Wage and Payments Interest Economy
Fig. 1.1: The Flow of Goods, Services, Resources and Money Payments in a
Simple Economy.
In their households, people make two sets of decisions: a) selling the inputs they own, primarily their labour and b) buying goods with their incomes. The enterprises or businesses engage in production, using the labour and other inputs bought from households. The goods produced by the firms are sold ultimately to the households.
The interactions of households and firms bring together the two sides of economics: demand and supply. The action occurs in two sets of markets; that

for inputs and that for outputs. In the input markets, households offer their labour, land and capital. Firms buy these inputs at prices set in the