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Unit 2.1: Economic Systems

Ref: Complete Economics for Cambridge IGCSE & O Level by Moynihan, D. & Titley, B.

Outline

What is an economy? Resource allocation Economic systems

Market Planned Mixed

Comparative Analysis

What is an economy?

Where the production, exchange and consumption of goods and services take place.

Production is influenced by goals- profit, social- and consumer demand.

An exchange takes place in a market.

Resource Allocation

Scarce resources and capital What, how and for whom to produce?- Economic

System Involves public and private sectors and

consumers.

Economic Systems: Market Economy

All decisions made by the private sector. There are no purely market economy as the

government usually has some role in it. Closest example may be the U.S

Economic Systems: Planned Economy

Most decisions made by the public sector. No incentive to compete for sales and keep costs

low. Examples include Russia and China after the 2nd

World War until the 1980s.

Market Systems: Mixed Economy

Decisions split between private and public sectors. Most countries follow this system. For example in Singapore the Ministry of Trade and

Industry overlooks most matters related to businesses through laws and regulations.

Companies are however given much freedom to act according to market demand and supply.

Comparative Analysis

Market Planned MixedAll decisions made by private sector.

Most decisions made by public sector.

Decisions split between public and private sectors.

Markets might fail to produce worthwhile g&s.

There might be wasteful or harmful activities.

There might be wasteful activities as consumer demand is not necessarily considered.

Government intervention can distort allocation.

Comparative Analysis:

Market Planned MixedA wide variety of g&s Only what the govt

wants is producedLaws & regulations can increase production costs and reduce supply

Quick response to changing wants and spending patterns.

Central planning and bureaucracy means slow response or even customer choice ignored

Public sector may be inefficient and produce poor quality g&s

Profit motivates product development and more efficient production

No incentive to compete for sales or to keep costs down

No taxes Strong govt presence through taxes, laws, restrictions and regulations.

Taxes can distort market price signals and reduce work incentives

Comparative Analysis:

Market Planned MixedOnly profitable goods are produced.

Only what the govt wants are produced

Provision of public goods

Only customers who are able to pay for goods get them.

Everyone can get the same product

Provision of public services

Resources will be employed only if it is profitable

Everyone can be employed as wanted

Public sector jobs and welfare

If it is profitable, harmful goods may be produced

The govt decides whatever goods are produced

Laws against harmful goods

Comparative Analysis:

Market Planned MixedHarmful effects may be ignored

Depends on the govt Laws and regulations that protect

There may be domination of market supply

The govt dominates the market

Government can regulate.

Spending may be for non-economic reasons

Other References

http://www.s-cool.co.uk/category/subjects/a-level/economics/free-market-v-command-economies

http://www.slideshare.net/mxcastro/economic-systems-5098911

http://www.youtube.com/watch?v=d8ivuSUfTg4