Economic Systems

There are three major types of economic systems, each with their own drawbacks and benefits: the Market Economy, the Planned Economy and the Mixed Economy. An economic system is loosely defined as a country’s plan for its services, goods produced, and the exact way in which its economic plan is carried out.

Market Economy In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development.

A market can be defined as any economic activity designed to satisfy the needs of society. On one hand we have consumers who demand goods. On the other hand we have sellers who aim to satisfy demand by providing the required goods and services while at the same time, making a profit. In other words, the market can be viewed as the area where individual decisions about buying and selling interact. On one side we have purchasers or consumers who wish to buy single consumer goods, consumer durables and consumer services. On the other side we have producers willing to supply these commodities who therefore must buy factors of production and produce services.

The needs or wants of consumers are unlimited but resources to satisfy them are finite. Because of this dilemma, economic goods are considered to be scarce in relation to the demand for them. In other words, consumers must choose between the alternative goods available. The collective action of all consumers determines the market demand. Sellers, too, are faced with the problem of scarce resources and must exercise choice. Their collective action determines the market supply.The interaction of the two market forces of supply and demand determines the market price for each commodity or service.

Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors.

The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly.

Such a system is very efficient. The economy adjusts automatically to meet the changing demand. No planners have to be employed, firms tend to be highly competitive, new advanced products and low prices are good ways to increse sales and profits.

Not surprisingly there are also problems. Some goods would be underpurchased if the government did not provide free or subsidized supplies. Healthcare, education, defence and policing are impossible to supply individually in response to consumer spending. Production alters swiftly to meet the changing demand, which can result in higher unemployment rates and cause social problems. Furthermore, safety standards concerning products, services and working conditions require large-scale government intervention to pass laws to protect consumers and workers. Finally, at certain times firms tend to cut back on production and the development of new ideas, which can lead to a recession.

Planned Economy A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government.

The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present in a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand.

On the other hand, a planned economy aims at using all available resources for developing production instead of allocating the resources for advertising or marketing.

Mixed Economy A mixed economy combines elements of both planned and market economies in one cohesive system. This means that certain features from both economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country - both sectors play an important role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and socialist economic policies and often arise in societies that seek to balance a wide range of political and economic views.

Дата добавления: 2015-11-14