Economic Systems

An Economic system is the system of production, distribution and consumption of goods and services of an economy. It is the set of principles and techniques by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources. The economic system is composed of people and institutions, including their relationships to productive resources.

There are three basic economic systems 1. Capitalism 2. Socialism 3. Mixed Economy

What is Capitalism? Capitalism refers to an economic and social system in which the means of production (capital) are privately controlled; labor and goods are traded in free market and profits are regularly reinvested in new ventures. Pure capitalism has always only existed in theories Capitalism has been dominant in western world since the end of feudalism. The desire for profit is the sole consideration. (Ref: p.816-825, Dewett K K, Modern Economic Theory)

Features of Capitalism
Right of Private property Freedom of enterprise Freedom of choice by the consumers (consumer sovereignty) Profit motive Class conflict (Haves and have nots) economic inequalities Un- coordinated nature Vital role for entrepreneur Control with risks he who risks his money must also control the business Perfect competition Importance of price system

Demerits of Capitalism
Wasteful competition Human welfare ignored Economic instability and unemployment Property rights take precedence over human rights Class conflict Social injustice and economic inequality Misallocation of resources Emergence of monopolies and concentration of economic power Malpractices

Socialism Socialism is an economic organization of society in which the material means of production are owned by the whole community and operated by the organs representative of, and responsible to, the community according to general plan, all members of the community being entitled to benefits from the results of such socialized planned production on the basis of equal rights. (Ref. p. 826-844)

Features of Socialism Social ownership of means of production No private enterprise Economic equality Equality of opportunity Economic planning Social welfare and social security Classless society

Merits of Socialism
Social justice Better allocation of resources Improving productive efficiency Social security and welfare Economic stability Demerits Bureaucracy and red tapism Not successful in business Insufficient resources Misallocation of resources Loss of consumer sovereignty Lack of incentives Loss of economic freedom Concentration of power in the state Loss of personal liberty

Mixed Economy Mixed economy is an economic system which is neither pure capitalism nor pure socialism but a mixture of the two. In the system we find the characteristics of both capitalism and socialism. (Ref. p.845-850) Main features
Co-existence of the public and private sectors Role of price system and government directives Govt. regulation and control and private sector Consumers sovereignty protected Govt. protection of labor Reduction of economic inequalities Control of monopoly.

Market Economy A market economy is an economy based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand. This is often contrasted with a planned economy, in which a central government determines the price of goods and services using a fixed price system. Market economies are contrasted with mixed economy where the price system is not entirely free but under some government control that is not extensive enough to constitute a planned economy.

Third World Economies

The economically underdeveloped countries of Asia, Africa, Oceania, and Latin America, considered as an entity with common characteristics, such as poverty, high birthrates, and economic dependence on the advanced countries. The French demographer Alfred Sauvy coined the expression ("tiers monde" in French) in 1952 by analogy with the "third estate," the commoners of France before and during the French Revolution-as opposed to priests and nobles, comprising the first and second estates respectively.