ECONOMIC SYSTEMS
1. Market economies (Free market economies)
- The key features of a market economy are:
a) There is private ownership of all economic resources
b) Resources are allocated towards making those products that consumers wish to buy.
c) Firms obtain information about the products that consumers most and least want to buy through price
levels and price changes. If more consumers want to buy a product then the price on the free market is
likely to rise.
d) Firms operate in order to make profits.
- The role of the government in such countries is very restricted.
- It is usually limited to providing defence forces and internal police and justice systems, controlling the
money supply to prevent serious inflation and possibly taking measures to limit extreme monopoly power
of unions or businesses
- There are economies that are much closer to this model than others for example USA and Taiwan
Possible Advantages
1. Profit motive should make firms operate efficiently
2. Competition should help to keep prices low and lead to release of new products
3. Consumers have choices
4. Work is encouraged as taxes are very low
Possible Disadvantages
1. Monopolies might be created as new business owners see the gains to be made from reducing
competition
2. No state support for the elderly, unemployed etc
3. No government control over pollution
4. Income differences, which are likely to be substantial, not reduced by taxes
2 .PLANNED ECONOMIES
-The best examples of countries that adopt central planning to allocate resources to production and the
completed products to the population are Cuba and North Korea.
-As planned economies are most closely associated with communist political systems, the number of such
economies in Eastern Europe was greatly reduced with the ending of communists controls in the early
1990s
- The key features of a planned economy are:
a) There is state ownership and or control of most of the economic resources
b) Central state planning decides what should be produced, the production methods to be used and how
output should be distributed amongst the population
c) Consumers have little influence over what is produces and the use of prices to indicate consumers
preferences for goods is unimportant.
Possible advantages
1. Central planning prevents duplication and wasteful competition, for example in supply of bus
services
2. Production decisions are based on the state ‘s assessment of people ‘s needs- not consumer
spending patterns
3. Allow for long-term planning-private firms often interested in short term profits
Possible disadvantages
1. No consumer choice
2. No completion to improve product design and keep cost and prices low
3. Workers may be poorly motivated- no gains from working harder or showing enterprise to
make a business successful.
4. Very slow and bureaucratic decision making
3. Mixed economies
- Nearly all economic systems today come into the category of mixed economies.
- This means that there is some private business activity- driven by the profit motive and some state
owned and controlled organisations, often operating for non-profit reasons
- The strength of the mixture between private enterprise and state organisations varies considerably.
- For example in the Uk in 2000 the state controlled by its spending decisions whilst in Zimbabwe it was
nearer 70%.
- The main features of a mixed economy are:
a) Many products and services are provided only by the private businesses not by the state for example
cars computers and mobile phones
b) Most essential services (often referred to as public goods) , such as police, fire service, defence, street
lighting, social services and prisons are only provided by the state - yet even this is changing in some
countries, with privately owned prisons contracting services to the government
c) Many important goods and services which can benefit society as well as the consumer often called
merit goods) are provided by both the state and the private sector of industry for example schools, health
services and broadcasting
d) In order to finance state operated services, the population pays taxes to the government
e) The government places limits on the nature of business activity by for example taking measures to
control pollution from factories and by restricting monopoly powers of some firms
Possible advantages
1. State provides essential services for all in society- whether rich or poor
2. Private sector still encouraged to be successful and allowed to earn profits from enterprise
3. Competition allows the advantages seen in a free market economy
4. Consumer choice exists and work incentives too
5. Inefficient business behavior is controlled or outlawed, for example dangerous products or
polluting factories
Possible disadvantages
1. Taxes may be heavy to pay for state goods and services- this could reduce incentives to work
hard or make profits
2. State organisations can be less efficient than private sector alternatives
3. Excessive controls over business activity can add to costs and discourage enterprise
