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Economic systems using different criteria

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Topic updated on 02/14/2019 09:27am

The economic system consists of: consumers, producers, government and industrial organizations

 

  • Each and every system purchases goods and services in order to satisfy human needs
  • There is a coordination mechanism among these sectors
  • It has developed various conventions, traditions, laws and regulations and norms for the function of the mechanism.
  • Some sectors control the other sectors in order to maintain the sustainability of the mechanism

A few shapes could be found in the coordinating mechanism as follows 

  • Traditions
  • Price Mechanism
  • Command / Planning mechanism
  • When allocating scare resource answer the basic economic problems: what to produce in what quantity, how to produce and for whom to produce by the coordinating mechanism
  • The price mechanism provides answers to the basic economic problems based on the profit and the price signal of the goods market and the factor market
  • The planning mechanism provides answers to the basic economic problems concerning the common welfare in general

 

The laws and regulations mentioned below exist in each and every economic system in order to strengthen the economic process

  • Legal framework
  • Here, freedom of property, freedom of entrepreneur, freedom of choice are
    specially important.
  • Process
  • Policies Here economic policies and social policies are important
  • Norms and traditions
  • Habits and culture

Any society face basic economic problem generally.
• Different economic systems occur as the result of solving these basic economic problem.
• These economic systems can be categorized as Market economy, Command economy and Mixed economy.
• Market economy is termed as a Capitalist economic system or a Free enterprise economic system, alternatively.

 

The main characteristics of a Market economy can be explained as follows

 

  • Private ownership of property
  • Free enterprise and freedom of choice
  • Competition and free market
  •  Function of a price mechanism
  • Self interest and profits
  • limited role of the government
  • A price mechanism functions as the coordinating mechanism of solving basic economic problems in the market economy.
  • The basic economic problems of what and how much to produce is solved in the Market economy by the price signals of the good market.
  • The basic economic problem of how to produce is solved in the market economy by the signals of the factor market.
  • In the market economy , individual income is decided by two factors such as , price of factors of production in the factor market and exchange of quantity for the price
  • The price mechanism does the following functions in the market economy
  • Signaling function
  • Incentive function
  • Allocation function

There are some disadvantage also in the market economy such as,

  • Inefficient allocation of resources.
  • Failure to provide public goods and merit goods.
  • Externalities.
  • Occurrence of economic disparities.

Command economic system is explained as an economy where the basic economic questions are solved by the centrally planned authority.
The main characteristics of a Command economic system can be explained as 

  • Government owns all the factors of production except labour.
  • Basic economic problems are solved by a centrally planed authority under
    the guidance of the government.
  • Competition and free market
  • Function on social welfare
  • A centrally planned authority decides on what and how much to produce andinforms production units.
  • A centrally planned authority decides on how to produce. production units are the
    government entrepreneurship and incentives are decides according to the orders of a centrally planed authority.
  • For whom to produced is decided according to the price of factors of production
  • Because of the disadvantages of Command economic systems, these economic systems have been transited to Market economy.Examples: Russia, China and eastern European countries
  • Most characteristics of Command economic system and Market economic systems are mixed up and mixed economies occur in most countries
    Example: Sri Lanka, India and Pakistan

The Following characteristics can be seen in a Mixed economic system.

  • Public ownership of property
  • Private freedom limited.
  • The decisions regarding allocating resources of society is taken by the
    government or is centrally planed by authority.
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