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 |
