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LESSON : ECONOMIC SYSTEMS

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LESSON : ECONOMIC SYSTEMS LEARNING OBJECTIVES: Define what is an economic system Identify the three types of economic systems Define the term market – PowerPoint PPT presentation

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Title: LESSON : ECONOMIC SYSTEMS


1
LESSON ECONOMIC SYSTEMS
  • LEARNING OBJECTIVES
  • Define what is an economic system
  • Identify the three types of economic systems
  • Define the term market
  • Describe the three forms that a market can take
  • Describe the three types of economic systems
  • State the advantages and disadvantages of each,
    with examples

2
Economic systems defined
  • Economic systems refer to the structures which
    have been put in place to deal with the economic
    problem (how scarce resources are allocated among
    competing or conflicting wants). It involves the
    ways in which a society organizes for the
    production and distribution of goods and services
    to satisfy the needs of its people. How the
    society decides to provide for the needs and
    wants of its people will influence the type of
    economic system that is adopted.

3
Types of economic systems
  • The three main types of economic systems adopted
    by countries are
  • The market driven economy, free market economy,
    capitalist economic system, or laissez-faire
    economic system, right wing system
  • The planned, controlled, communistic,
    collectivist or command economy, left wing
    system
  • The mixed economy, centralist.

4
Market defined
  • A market is an arrangement in which buyers and
    sellers are brought together to transact
    business. It could be a physical place or it
    could be a situation or a set of conditions that
    facilitates the trading process.

5
The Market Driven Economy
  • In this type of economy, private individuals (and
    not the Govt), own the resources of the economy.
    The answers to the economic questions of what,
    how and for whom to produce are provided by the
    price mechanism, or system.

6
Key features of a free market economy
  1. There is very little govt interference (guidance
    and financial aid to private businesses)
  2. Market forces of supply and demand largely
    determine prices
  3. There is much competition among firms for
    patronage, which keeps prices down but not
    necessarily low
  4. Unregulated use of factors of production

7
Key features of the free market economy
  1. Ownership of all profits after payment of taxes
  2. By driving costs down, in order to maximize
    competitiveness, the system tends to disadvantage
    labour with low wages
  3. It also tends to suppress trade unions, regarding
    their demands as a curb on market freedom
  4. By maximizing profit, it tends to promote actions
    that may be against the public interest, e.g.
    monopoly pricing, shoddy goods, tax evasion
  5. Monopolies are allowed to proliferate they help
    govt by paying high taxes, and may also support
    political parties in fighting elections
  6. Laws, rules and regulations have to be introduced
    to protect consumers from unscrupulous traders.

8
Advantages of the market economic system
  1. Manufacturers are free to produce what the
    consumers require, and the consumers in turn are
    free to spend their money as they see fit.
  2. Decision-making is not controlled, so there is
    greater participation in the decision on what is
    to be produced to satisfy the needs of the
    consumer.
  3. A large variety of goods and services are
    produced to satisfy the needs of the consumer.

9
Advantages of the free market system
  1. The market economy is adaptable to changes that
    arise from time to time. E.g. if there is any
    shift in the demand for a product or service, the
    economy can adjust to meet the new demand.
    Whether it takes a short or a long time to adjust
    to the new demand depends on the type of, or
    nature of the goods or service involved.
  2. There is very little govt intervention in the
    market economy. As a matter of fact, there is a
    lack of govt intervention.
  3. There is a greater degree of competition as goods
    and services providers scramble for a share of
    the market.

10
Disadvantages of the market system
  1. Since the making of a profit is the dominant
    motive of the private sector, only goods or
    services that yield the highest profit will be
    produced. E.g. needed infrastructure such as
    the construction of roads or bridges or the
    provision of security for the defence of the
    country would not find ready investment since
    their use does not usually provide a profit.
  2. Consumers could be exploited through the
    imposition of high prices for essential goods if
    there is insufficient competition among producers
    or Govt regulation of businesses.
  3. This system can lead to a more unequal
    distribution of income, with the rich get richer
    and the poor get poorer. The rich can bid up the
    prices of luxuries, and resources will be used to
    produce these items rather than necessities.

11
Disadvantages of free market system
  1. The free market can lead to monopolies which can
    exploit consumers by demanding higher prices for
    certain goods and services because they are the
    only seller in the market.
  2. Too much money may be spent on advertising to
    attract customers.
  3. The price mechanism may work sluggishly and as a
    result suppliers will react slowly to demand
    changes.

12
Disadvantages of the free market system
  1. The profit motive may not always lead to maximum
    welfare for the society. E.g., the effect of
    production on pollution and destruction of the
    environment may not be considered.
  2. Resources can remain unused if it is thought they
    will not yield a profit.
  3. When govts intervene with legislation to control
    undesirable actions (e.g. controlling pollution
    through large fines), firms tend to raise prices
    to cover their increased costs.

13
The Planned Economy
  • In this type of economy, all the resources are
    owned by the State (or Govt owns and controls
    the factors of production). The State owns and
    runs the factories, mines, farms, transportation
    system, food distribution outlets, among others.
  • The decision about what to produce, how to
    produce and for whom are made by a centralized
    planning agency.

14
Key features of planned economies
  • A govt central planning body oversees every
    economic activity and committees are appointed by
    the head of state to take charge of various
    sectors of the economy
  • Central authorities decide what to produce, how
    to produce, who gets the output and how much they
    get
  • Command economies may be introduced as a response
    to bad planning or poor distribution, but they
    may also suffer from the same problems. When
    production or distribution go wrong, there is no
    alternative source of supply, so that rationing
    can be an unwanted side-effect of a planned
    economy (as experienced by Guyana for many
    years). For the same reason black markets can
    result, drawing on unofficial sources of supply.

15
Key features of the controlled economy
  1. Much investment is not used on consumer goods but
    on military goods (army tanks, guns, space
    exploration). This was especially the case in
    Russia and China
  2. Citizens live in a highly regimented society,
    with govt officials, police or even soldiers on
    nearly every street corner even on farms, to
    check on production
  3. Oppression, high unemployment and poverty are
    prevalent
  4. Tightly controlled (and often poor) economic and
    social conditions tend to result in
    de-motivation, disaffection and ultimately
    defection of citizens and a brain drain.

16
Advantages of a Planned Economy
  1. Wastage of resources would be reduced since the
    State makes the decision as to what is produced,
    and directs the resources into these areas.
  2. Profits gained from State industries may be used
    to generate further production and expand
    provision of public goods such as hospitals and
    other welfare services. Consideration may also
    be given to the improvement of general working
    conditions of State employees.

17
Advantages of the planned economic system
  1. Since profit maximization is not the motive,
    there may be greater employment of resources and
    the social cost may be taken into consideration.
    Thus planners can ensure that adequate resources
    go into the production of social (public) goods,
    and advertising can be limited to providing
    information only.
  2. Since the State determines the price of goods and
    the amount paid in salaries, then no group of
    workers by themselves can force prices up.
  3. Income is more evenly distributed.

18
Advantages of the planned economic system
  1. Workers may tend to increase their efficiency
    since they may feel that they are working both
    for themselves and for their country.
  2. The monopoly power of the State can be used for
    the welfare of the society as a whole.

19
Disadvantages of a Planned Economy
  1. There may be much inefficiency and wastage of
    resources as the profit motive for production is
    missing. E.g., there may be wastage of manpower
    because large numbers of persons (officials) are
    usually required to do the planning in this
    system than are required in the free market
    system.
  2. Conflicts of interest arise because what the
    country needs may not be what the people want
  3. The Govt protects workers by setting a minimum
    wage (which may be inadequate or subsistence)

20
Disadvantages of the planned system
  1. The lack of scope for individual incentives may
    lead to a lack of initiative. Furthermore, since
    people are not free to choose what they want to
    produce, how and in what quantities, initiative
    and morale may be further reduced. In addition,
    the State ownership of resources reduces the
    incentives of the members of the society to work
    harder. Since they are working for the State and
    not for themselves, their effort will not be as
    great.
  2. Govt can freely intervene in areas where there
    is an imbalance to protect the firm or the
    consumers from unfair practices.
  3. Production usually takes place ahead of demand
    and this could lead to waste as once the
    consumers needs are satisfied, they may not
    purchase goods. In many instances they may find
    the goods to be unattractive or of poor quality.
    Furthermore, it is impossible to estimate
    accurately the needs of the consumers. This may
    lead to shortages of some goods and a glut of
    other goods. Moreover, the Govt can impose its
    choices on the rest of the society, for e.g.,
    producing more military goods and fewer consumer
    goods.

21
Disadvantages of the planned economic system
  • There is usually a large bureaucracy to
    administer the workings of such a system and the
    problems associated with these tend to arise.
    The needs of society has to be determined and
    their provision has to be arranged by politicians
    and bureaucrats (civil servants) who may not be
    trained in the management of large organizations.
  • Moreover, large organizations are unwieldy and
    difficult to manage efficiently. This may lead
    to coordination problems. E.g. in the former
    Soviet Union, in spite of goods harvests there
    were episodes of food shortages because there
    were not enough trucks to transport the food.

22
The Mixed Economy
  • In this system both the govt and the private
    sector participate in making the decisions
    regarding what is to be produced, how to produce
    and for whom to produce. The society recognizes
    the important role of the govt in the provision
    of certain goods and services that are
    large-scale in nature, e.g. education and health,
    road construction and maintenance, social
    welfare, amongst others, and accepts this input.
    The govt undertakes these responsibilities as
    the more efficient provider of such services.
  • In this system, trade unions tend to play a more
    powerful role and are in many instances,
    responsible for a faster increase in wage and
    salary rates.

23
Key features of a mixed economy (in the region)
  • There has been a marked rise in the formation of
    non-governmental organisation (NGOs). These are
    autonomous, or nearly autonomous, bodies in the
    private sector that have been charged with
    running or overseeing the provision of services
    and goods in the public interest
  • Consistent with this weakening of the public
    sector in the region, there has been a
    strengthening of private sector participation as
    govts have invited foreign companies to take on
    former public sector responsibilities. In Guyana
    since 1992, for e.g. more than 30 public sector
    enterprises have been privatized there are now
    only a handful of public enterprises

24
Key features of the mixed economy
  1. There is more trade union activity than in a
    planned economy, where trade unions might hardly
    exist
  2. A greater premium is placed on consumer
    protection, and there is zero tolerance of
    environmental pollution
  3. With the growth of tourism in the region, some
    industries have mushroomed not just hotel
    building, hotel catering services and the
    hospitality industry, but also telecommunications
    (including cell-phones) and computer based
    technology
  4. Tourism has become the main attraction for most
    investment, replacing traditional investment
    interest, e.g. sugar, bananas or oil, according
    to the country

25
Key features of mixed economies
  1. There is a markedly high level of poverty,
    unemployment and crime. This seems to be the
    most persistent feature of all economic systems
    that have been tried, and of all political
    parties and govts
  2. There is growing dependency on foreign aid,
    imports and the transfer of technology from
    developed countries. TT and Jamaica, for e.g.,
    regularly get financial and other types of
    assistance (e.g. ships and aircraft to fight the
    drug trade) from the USA and Britain, and cheap
    loans from Canada, China, Germany and the OPEC
    countries

26
Advantages of the mixed economic system
  1. The state can intervene in areas of the economy
    through the passing of laws to protect citizens
    from unfair trading practices.
  2. Both govt and private sector can cooperate in
    the delivery of certain services through
    franchising as seen in the transport sector and
    hospital catering.
  3. It is believed by some that this form of economy
    is more equitable since it avoids the creation of
    huge numbers of poor people (through the
    activities of trade unions who represent
    workers).

27
Disadvantages of mixed economies
  1. One disadvantage often levelled at this system is
    that the State should not participate in business
    enterprise since they are not efficient managers
    of resources.
  2. Too much govt regulation may dampen the free
    enterprise spirit.
  3. Some Sate-owned industries are allowed to operate
    inefficiently thus wasting resources.
  4. Where govt intervenes in the market by setting
    maximum or minimum prices, this may cause either
    excess demand or supply which may be difficult to
    regulate in the long run.

28
Comparison of the three economic systems
  • The goal of all three economic systems is the
    efficient allocation of the societys scarce
    resources between competing wants.
  • The market economy also tries to preserve
    individual choice in the allocation of those
    resources. Market economies usually have
    democratically elected govts.
  • Planned economies strive for equality in the
    distribution of resources among members of the
    society, in addition to their efficient
    allocation. They also try to produce adequate
    amounts of social goods which would not be
    produced by the pure market economy.
  • The mixed economy recognizes and tries to solve
    this by leaving those activities which can be
    efficiently done by the private sector in their
    hands. The activities which the private sector
    cannot undertake efficiently are handled by the
    govt.
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