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:
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 often distorted | To: | set by the market change with market |
Result: |
From:
| inefficiency full employment low inflation low standard of living shortages more equal distrib | To: | economic efficiency periods of unemploy. periods of inflation high standard of living wide range available less equal distrib. |
Problems: |
From:
| corruption=self interest lack of incentives (the incentive problem) distorted prices (the coordination problem) inefficiency | To: | monopoly= inefficiency inequality changing prices instability (UE, IN) pollution |
OVERALL: |
From:
| LESS FOR MORE (INEFFICIENT) and a lower standard of living | To: | MORE FOR LESS (EFFICIENT) and a higher standard of living |
No comments:
Post a Comment