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Types of economic system Essay

An economic system refers to the structure in society within which we make decision about:

(a)What to produce (goods and services)
(b)How to produce the goods and services
(c)Where to produce
(d)How to allocate and distribute the goods and services to meet the demands.

The four main kinds of economic system are:

(1)Traditional (subsistence) Systems
(2)Market or Commercial Systems
(3)Centrally Planned System
(4)Mixed Economic Systems

Subsistence Economic Systems:

An economic system under which people produce just enough goods to feed their households with very little left for sale or for exchange in the market. Characteristics of Subsistence Economic Systems:

(a)Production is geared towards subsistence (the family) and basic survival. (b)Trade is mainly by barter system (direct exchange of goods and services). (c)Market and money are of little importance.

(d)Custom and traditions are major influences on what is produced and how products are allocated. Market (Capitalist) Economic Systems:
Under Capitalist economic systems, decisions about what, how and where to produce a particular good are determined by market conditions such as supply, demand and price. Characteristics of Capitalist Economic Systems:

(a)Production is large-scale and geared towards markets.
(b)The market (price) determines allocation and use of society’s resources. (c)The price mechanism determines supply and demand of goods and services. (d)Competition among producers work to ensure stable and lower prices for consumers. Drawbacks of the Market System:

a)Since market does not exist for some resources, only some environmental resources might be used and exchanged in the society. b)The long cycle of production of some crops (e.g. Timber and tree crops) does not allow for rapid adjustment of demand and supply so gluts and shortages often follow in succession. c)Market forces do not relieve resources problems when price decreases spur on demand but shortages of the commodity fail to stimulate immediate increase in supply. d)Strong demand and high prices may encourage supply to the point that a resource would be depleted beyond its critical limit. e)Externalities or environmental side effects (e.g. air and water pollution) result from market operations.

f)Part of the cost of production is borne by society and not the businesses. g)Cartels and monopolies manipulate supply to influence prices (and hence allocation of resources). h)The market system separates consumers of a good (e.g. Oil) from its producers and from the production site hence responsibility for consequences of production is weakened. i)Businesses are pre-occupied with profit making so the environment is often sacrificed. Socialist or Centrally Planned Systems:

Under centrally planned economies, decisions regarding what commodity to produce, how and where to produce and how to distribute the products are made by government rather than the market. Characteristics of Socialist Economic System:

(a)Central government takes over decisions about production and marketing of goods. (b) Price controls keep prices low but discourage production. (c) Attempts are made to allocate goods and services according to the needs of individuals (d) Private ownership of resources is restricted.

(e) The role of the market in determining prices, allocation of goods etc. is limited. Drawbacks of Socialist Economic Systems
(a)Government control creates little incentive to work hard or produce goods and services. (b)Serious resource problems including severe hunger and famine are rampant. (c)There can be extensive environmental damage.

(d)There is the question of who will guard the government if something goes wrong. (e)Individual initiatives are discouraged and the people look up to the government for the solution to their problems. Mixed Economic Systems:

Mixed economic systems combine elements of market and command economies. It is currently the most common economic system. Characteristics of Mixed Economic System Most mixed systems are capitalist in character but are generally a mixture of market and centrally planned economies. Governments often intervene to modify the market economy (prevent monopolies, influence prices and offer incentives to increase production).

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