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What is an Economic System?

Because of the fact that there is scarcity of resources and unlimited wants, it is always a problem to allocate resources in an efficient manner. We are constantly facing three basic questions. These are:

  • What to produce?
  • How to produce?
  • For whom do we produce?

Every community or country must choose and develop its own way of solving these problems. The way a country decides what to produce, how to produce and for whom to produce is called it Economic System.
The three Economic Systems existing are:

  • Market Economic system
  • Planned Economic System
  • Mixed Economic System

Note:

  • There are no PURE command economies
  • There are no PURE market economies
  • Instead there is a continuum of different characteristics

continuum of economic system

 

 

 

 

 

What happens when countries move from command economy to market economy?

CHARACTERISTIC

 

COMMAND ECONOMY

 

MARKET ECONOMY

Ownership of resources:

From:

government ownership

To:

private ownership

Decision making:

From:

centrally planned

To:

by the market

Motivation:

From:

"the social good"

To:

self interest and profit

Prices and Wages:

From:

set by the government
often distorted

To:

set by the market
change with market

Result:

From:

inefficiency
full employment
low inflation
low standard of living
shortages
more equal distrib

To:

economic efficiency
periods of unemploy.
periods of inflation
high standard of living
wide range available
less equal distrib.

Problems:

From:

corruption=self interest
lack of incentives (the incentive problem)
distorted prices (the coordination problem)
inefficiency

To:

monopoly= inefficiency
inequality
changing prices
instability (UE, IN)
pollution

OVERALL:

From:

LESS FOR MORE
(INEFFICIENT)
and a lower standard of living

To:

MORE FOR LESS
(EFFICIENT)
and a higher standard of living

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