3 Major Economic Systems
There are 3 major mainstream economic systems, and they are: 1) Market economy
2) Mixed economy
3) Command economy.
The distinction between them stems from their approach to answering the 3 basic economic questions: 1) What to produce?
2) How to produce it?
3) How to distribute it?
❖ Market economy:
o All economic resources are owned by the people.
o They decide how and where to channelize those resources.
o The market forces of demand and supply determine the equilibrium market price, which in turn determines profits. o This profit motive is the driving force behind the whole economy. o The government plays only a peripheral role in setting up the basic structure and rules controlling the markets. o The political counterpart of this system is called "capitalism." o Market economy believes in Laissez-faire meaning non-intervention by the government in the functioning of the economy. o The basic logic is that the scarce economic resources would automatically go into the most desirable channels, because they would be the most profitable ones based on consumer demand for those goods and services. o Consumers reign supreme in a market economy.
o They act by demanding (or not demanding a good) and the producers react by producing (or not producing) that commodity.
❖ Command economy:
o It is also called a planned economy.
o Here the government owns all the economic resources and all the factors of production. o The government decides the answers to the 3 fundamental economic questions. o The government decides the allocation and channelization of scarce economic resources. o There is no interplay of the market forces of demand and supply and the pricing mechanism in deciding this allocation. o There is government regulation controlling almost every aspect of people's lives. o Since people do not own the economic resources, there is no place for private initiative and no incentives at work. o The political system which goes with this economic style is called a socialist / communist system.
❖ Mixed economy:
o It is a mixture of the features of both the market and command economies. o They have a private (market) as well as a public (government) sector. o In the private sector the 3 economic questions are answered by the market forces of demand and supply and the resulting prices. o The government only sets up the basic regulations within which the private businesses can play. o There is generally no more government intervention in this sector. o People own the economic resources and use it based on their own choice and preferences, motivated by profit. o The allocation and channelization of economic resources are done based on market prices and market returns. o There is little (to none) role of the government in this sector, except laying down the broad rules of the game. o The government outlines the demarcation between legal and illegal, (right and wrong) aspects of how the market can work. o The government does not intervene in the day to day operation/administration of this sector. o Then there is a parallel public sector, totally under government control. o Here the economic resources are owned by the government.
o This sector generally operates in those economic areas where there is a high social need little to no profit margin. o Thus private investment will not be channelized into sectors. o These are generally social infrastructure projects like roads, highways, dams, police, defense etc. o The idea of a mixed economic system was to integrate the best of both the market economy (private initiative) and the command economy (government allocation of resources) which would nullify the ills of the other system. o This way the country gets the best of both worlds.
The 3 Key Economic Questions every Society must answer:
Who? What? and How?
As we have been learning, everyone is forced to deal with scarcity. We, as individuals,...
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