Economic System

Chapter 2

ECONOMIC SYSTEMChapter 2Economic systemEconomic systemis asystemofproductionandexchangeofgoods and servicesas well asallocation of resourcesin asociety.Resource allocationis the assignment of availableresourcesto various uses.Includes the combination of the various institutions, agencies, entities (or even sectors as described by some authors) and consumers that comprise the economic structure of a given community.The three (3) Economic ProblemsConsumption

Production

DistributionWhat goods and services should be produced and in what quantities?Includes the choice of the resources to produce and of what other alternativesHow these goods and services should be produced?Includes whom are the producers and what technological ways are used.For whom these goods and services be produced? Includes the people involved to the produced goods and how to distribute goods properly.Is money a resource or a factor of production?Factors of production are what is used in the production process in order to produce output.Land includes natural resource above or below the soil.Labor - the ability to work.Capital tools to produce.Money is only a facilitator in the acquisition of those goods. And if money or credit are constraining production, this belongs in a separate constraint, not in the production function.TRADITIONAL ECONOMY("hands on" systems, such asstate socialismorcommunism, also known as planned economy)an originaleconomic systemin which traditions, customs, and beliefs shape the goods and the products the society creates.defined bybarteringand trading.popularly conceived of as "primitive" or "undeveloped" economic systems.Example:They adapt only on their basic needs like food, shelter,and clothing.

COMMAND ECONOMY("hands on" systems, such asstate socialismorcommunism, also known as planned economy)theeconomic systemin which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a public body such as a government agency.may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both.

COMMAND ECONOMYthe government controls and regulates production, distribution, prices.In a command economy, production is decided by government agencies, who decide the most socially efficient goods to produce. Government agencies may also set prices or give consumers rations directly.Some centrally planned economies may consist of not just state owned enterprises, but some privately owned firms who are closely directed by state management.

MARKET ECONOMYIs aneconomyin which decisions regardinginvestment, production, and distributionare based onsupply and demand, and prices ofgoodsandservicesare determined in afree price system.. Alsocalledfree economy, free market, orfree market economy. Capitalism generally refers to economic system where themeans of productionare largely or entirely privately owned and operated for a profit, structured on the process ofcapital accumulation. MARKET ECONOMYLaissez-faire is synonymous with what was referred to as strictcapitalistfree market economy.Free-market economy refers to a capitalist economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy.Welfare capitalism refers to a capitalist economy that includes public policies favoring extensive provisions for social welfare services.MARKET ECONOMYMarket socialism refers to various types of economic systems where the means of production and the dominant economic institutions are eitherpublicly ownedorcooperatively ownedbut operated according to the rules of supply and demand. MIXED ECONOMYIs aneconomic systemthat is variously defined as containing a mixture ofmarketsandeconomic planning, in which both theprivate sectorandstatedirect theeconomy; or as a mixture ofpublic ownershipandprivate ownership; or as a mixture offree marketswitheconomic interventionism.Most mixed economies can be described asmarket economieswith strongregulatoryoversight and governmental provision ofpublic goods. Some mixed economies also feature a variety ofstate-run enterprises.

MIXED ECONOMYthe mixed economy is characterised by theprivate ownershipof themeans of production, the dominance of markets for economic coordination, with profit-seeking enterprise and theaccumulation of capitalremaining the fundamental driving force behind economic activity.

SIGNIFICANCE OF ECONOMICS Optimizes Resource Usage In todays world, the amount of resources available to us is reducing each day. This condition will only worsen, if we keep using our resources with low efficiency and effectiveness. Economics provides a mechanism for looking at possible ways to optimize resource utilization and reduce wastages.

SIGNIFICANCE OF ECONOMICS Utilizes the Opportunity Cost This is another principle used for resources in which the scarce resources are utilized efficiently, after calculating and checking the opportunity cost. A simple theory of exclusion is put into play. If you choose something over another thing, then what loss you sustain is the opportunitycost. If we minimize the opportunity cost, we get maximum profits. SIGNIFICANCE OF ECONOMICS Gains Social Efficiency If a society keeps on putting money into its economy with no profits or loss, then the economy becomes inefficient and so does the society, as it gets dependent on the economy. If the input into an economy is larger than the output, then the society starts disintegrating and falls prey to destructive social evils, like unemployment and poverty.SIGNIFICANCE OF ECONOMICS Stabilizes The Overall Economy The stability of an economy is inevitable to any country or society. Only through economically sound practices can we ensure that the economy is stable and growing at the same time. In recent times, when the worlds economy fell, only a few countries were able to sustain their growth rate and prevent severe monetary impacts on their citizens.SIGNIFICANCE OF ECONOMICS Understands Individual Economics This is important for the growth of individuals economically. A person needs to understand the economic situations and stipulations present in his own life. He may not need the hardcore subjective understanding of economics, but he definitely needs to understand the economic practices that he must follow to eradicate chances of going broke or bankrupt.