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
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 | To: | set by the market |
Result: | From: | inefficiency | To: | economic efficiency |
Problems: | From: | corruption=self interest | To: | monopoly= inefficiency |
OVERALL: | From: | LESS FOR MORE | To: | MORE FOR LESS |
