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Economic System
An economic system is a mechanism which deals with the production, distribution and
consumption of goods and services in a particular society. The economic system is
composed of people, institutions and their relationships. It addresses the problems of
economics like the allocation and scarcity of the resources.
There are several basic and unfinished questions that must be answered in order to
resolve the problems of economics satisfactorily. The scarcity problem, for example,
requires answers to basic questions, such as: what to produce, how to produce it, and who
gets what is produced. An economic system is a way of answering these basic questions,
and different economic systems answer them differently.
But generally there we consider three basic types of economic system that are used all
over the world.
• Planed economy
• Market economy
• Mixed Economy
Planed Economy
A planned economy is also sometimes called a command economy. The most important
aspect of this type of economy is that all major decisions related to the production,
distribution, commodity and service prices, are all made by the government.
The planned economy is government directed, and market forces have very little say in
such an economy. This type of economy lacks the kind of flexibility that is present a
market economy, and because of this, the planned economy reacts slower to changes in
consumer needs and fluctuating patterns of supply and demand.
Planed economy became famous with Soviet Union choosing it for its attributes like
equal distribution of wealth and protection of interests of labor force. In these types of
economies government controls all major sector of economy and made decisions about
use of resources and distribution of wealth. Government decides what to produce and
direct all lower level enterprises to produce goods in accordance with national and social
objectives.
A planned economy may consist of state-owned enterprises, private enterprises directed
by the state, or a combination of both. A huge drawback of this system is that all the
profits go to the government so this lead to decrease in investment. This type of system
might stifle innovation and invention. It may not be quickly responsive to public desired
for products and services and may even limit the freedom of the people. It is so realized
that economic development cannot be achieved at the desired rate of growth without any
active government help and guidance.
Market Economy
In a market economy, national and state governments play a minor role. Instead,
consumers and their buying decisions drive the economy. In this type of economic
system, the assumptions of the market play a major role in deciding the right path for a
country’s economic development.
Market economies aim to reduce or eliminate entirely subsidies for a particular industry,
the pre-determination of prices for different commodities, and the amount of regulation
controlling different industrial sectors. The absence of central planning is one of the
major features of this economic system. Market decisions are mainly dominated by
supply and demand. The role of the government in a market economy is to simply make
sure that the market is stable enough to carry out its economic activities properly.
In this type of economy prices of factors of production and everything are decided by
market forces of demand and supply. In this system companies work to maximum their
profit and thus produce goods which are demanded by public. A big drawback of this
system is that companies try to maximize their profit and in this effort they ignore rights
of labor force and pay those minimum wages possible, this lead to unequal distribution of
wealth. This system doesn’t guarantee of full employment and sometimes leads to water
and air pollution and problems like inflation too.
Mixed Economy
Both Planed economy and Market economy had some major flaws which can be
disastrous for the economy, so a new economic system which includes features from both
planed economy and market economy is used by most of the nations in the world. This
system is called Mixed Economy system.
In this system private companies are allowed most power over decisions regarding profits
and distribution of wealth while government collects taxes from them to work for the
benefit for the poor to help create equal distribution of wealth, government also regulates
companies with rules and regulations so they wont do anything that harm society and to
protect the interests of labor force. In some countries under this system some important
economic areas are like power and communication are closely monitored by government.