Unit-4-Notes-Economics

THREE FUNDAMENTAL QUESTIONS

*What to produce?
*How to produce?
*Who is to receive the products produced?
Note:
*These questions arise due to unlimited wants and limited resources.
*These questions will differ in different economic systems.

DIFFERENT ECONOMIC SYSTEMS

Planned Economy- For example Cuba etc
*It is also called Centrally planned or Command or Collectivist economy.
*Government takes decisions regarding the three fundamental
questions.
*Majority of the land and Capital are owned by the State and employs
workers.
*For State-owned enterprises the government gives instructions
calledDirectives.
*Basic products like education,housing etc are provided by the State at
free of cost or less price.

Market Economy-For example U.S.A etc

*It is also called Free enterprise economy.
*The Consumers takes decisions regarding the three fundamental
questions.
*Preference of the consumers is shown through Price Mechanism, for
example if there is demand for a product which means people are
willing to pay more, if price increases the firms will produce the
products in large quantities to earn more profit.
*Here more resources will be utilised for the products which has more
demand.
*Here government intervention is minimum
*Land and Capital are owned by the Private sector.
*Some firms use Capital Intensive Technology[more machines with less
manpower] and others use Labour Intensive Technology [more
manpower with less machines] to achieve Least cost of production.

ADVANTAGES OF MARKET ECONOMY

*It should be very responsive to changes in consumer demand.
*Here there is choice for Consumers,Producers and Workers.For
example Consumers can choose which firms to buy from etc.
*Profit motive and competition promote efficiency.
*High incomes provide people to work hard where firms will expand.
DISADVANTAGES OF MARKET ECONOMY
*Consumers and private firms take into account the cost and benefits to
themselves and not the cost and benefit of others.
*Competition between firms should ensure efficiency but in practice
there may little competition.
*Firms cannot respond to the desires of the consumers because they
cannot attract the workers who lack the right skills or geographically
immobile.
*Private firms will not make products unless it is charged.
*Advertising can distort consumer choice.
*Here there is uneven distribution of income.

MIXED ECONOMY-For example India etc

*It is a combination of the features of planned and Market economy.
STATE INTERVENTION
*The government should take into account all cost and benefit. For
example Railways would not make a profit in the private sector but it
should be maintained by the State if the benefit to the society is
greater than the cost.
*Government encourages the consumption of merit goods through
subsidies/provide information/passing legislation.
*Government can finance the production of products that cannot be
charged. For eg.Defence etc.
*Government intervenes the private sector from exploiting the
consumers by charging high prices.
*Government take steps to utilise maximum resources like labour etc
to create more jobs.
*Government encourages the private sector to use more resources in
future to capital goods.
*Government helps the vulnerable groups to have access to basic
necessities and create even distribution of income by taxing the rich.

CHANGES IN ECONOMIC SYSTEMS

*Countries like UK,New Zealand etc moved from Mixed economy to
Market economy.
*Here government intervention is reduced.
*Countries like Poland,Russia etc moved from Planned economy to
Market economy.
*Here Consumer choice was increased with increase in quality,income
inequality and poverty.
*Recently most of the countries have Market economy with Government
intervention.