Bastobota without reality chara

Economic Systems

There are three main types of economic systems: free market (capitalist), plamed (command) and mixed. The difference between the three systems stems from the, amount of government interference which takes place in the production and distribution of the goods and services.

THE FREE MARKET SYSTEM (also the Laissez-faire system)

Features of this System

In the free market system, there is no government interference in the working of the economy. The price mechanism is its main feature, prices of goods and services being determined by the demands made by the consumers and by the willingness of producers to supply these goods and services.

More over the resources are owned by the individuals , not by the state .

Advantages of free market economy :-

1.People are encouraged to work hard , because opportunities exist for individuals to accumulate high levels of wealth.

2.People can spend their money how they want ; they can choose to set up their own firm or they can choose for whom they want to work.

3.Through competition, less efficient producers are priced out of the market : more efficient producers supply their own products at lower prices for the consumers, and use factors of production more efficiently.

Disadvantages of free market economy

1.As the economy is free the wealthier members of the society tend to hold most of the economic and political power, while the poorer members have much low influence. Then is an unequal distribution of resources and sometimes production concentrates on luxuries, i.e. the wants of the rich.

2.The price mechanism may not work efficiently where services need to be provided or the benefit: of society as a whole (such as defense, education and health services).

3.Since the profit motive is all-important to producers, they may ignore social costs of production, such as pollution. Short-term profit performance may be considered more important than long-term growth.

4.Although. in theory factors of production such as labour are 'mobile' and can be switched from one market to another, in practice this is a major problem and can lead to hardship through unemployment. It also leads to these scarce factors of production being wasted, by not using them to fullest advantage.

5.Some firms may use expensive advertising campaigns to sell products which are basically the same as many other- products currently on sale. Other firms, who control most of the supply of some goods, may choose to restrict supply and therefore keep price artificially high or, with other suppliers, they may agree the prices to charge and so price will not be determined by the interaction of supply and demand.

THE PLANNED SYSTEM

This is also known as the command system .

Features of this system

Unlike the market economy, where the government plays no direct role in deciding what is produced the planned system relies exclusively on the State. The government will decide what is made, how it is made, where it is made, how much is made and how distribution takes place.

The resources - the factors of production - are controlled by the government on behalf of producers and consumers. Price levels are not determined by the forces of supply and demand but are fixed by the government.

Advantages of the planned system

1.Central planning can lead to the full use of all the factors of production so reducing or ending unemployment.

2.Economies of scale become possible due to mass production taking place.

3.' Natural monopolies ' such as the supply of domestic power, or defence, can be provided by central planning

4.There is less concentration on making luxuries for those who can afford them and greater emphasis on providing a range of good and services for all the population.



Disadvantages of the planned system

1.Consumers have little influence over what is produced and people may have little say in what they do as a career.

2.Since competition between different producers is not as important as in the market economy, there is no great incentive to improve existing systems of production or work. Workers are given no real incentive to work harder and so production levels are not as high as they could be.

3.The existence of such a powerful and large bureaucracy can lead to inefficient planning and to problems of communication. Furthermore, government officials can become over privileged and use their position for their personal gain rather than for the good of the rest of the society.

THE MIXED ECONOMY

There are no economies in the world that are entirely 'market' or 'planned': all will contain elements of both systems.

Features of this system

The mixed economy includes elements of both market and planned economies. The government operates and controls the public sector firms which includes health and education. The private sector is largely governed by the price mechanism and market forces.

Advantages

1.The necessary services, which make no profit are provided in this economy.

2.As in this economy private sector is there, individuals will work hard to make profit, as all profits will be enjoyed by him.

3.Prices of goods & services in the private sector are kept down through competition taking place.

2002