1. ECONOMIC SYSTEMS
We are looking at the economic foundations of a business, and these play important roles in determining how businesses operate in a particular society.
Economics is the study of how resources are distributed for the production of goods and services within a society.

2. ECONOMIC SYSTEMS
This how a society makes its production and consumption decisions.
An economic system describes how a particular society distributes its resources to produce goods and services.
A central issue of economics is how to fulfill an unlimited demand for goods and services in a world with a limited supply of resources
An economical system can also be defined as a set of methods and standards by which society decides and organizes the allocation of limited economic resources to satisfy unlimited human wants.

3. Economic Systems Eco systems must address 3 important issues:
What good and services and how much will satisfy consumer needs?
How will goods and services be produced, who will produce them and with what resources?
How are the goods and services to be distributed to consumers?

4. Economic Systems continued
There are three types of economic systems which are:
Capitalism
Command economy
Mixed economy
These economic systems therefore try to address the above important issues in economics

5. Capitalism
It is an economic system in which individuals own and operate the means of production that provide goods and services.
Adam Smith is known as the father of capitalism.
He argued that a society’s interests are best saved when the individuals within that society are allowed to pursue their own self interest.

6. CAPITALISM
Private ownership of property and of the means of production is the rule.
Individuals or groups of individuals can invest money in businesses or start their own businesses.
Owners and investors take risks, but make and keep profits.
The type, quantity and price of goods and services produced are determined in the market place by the forces of supply and demand.

7. Capitalism Continued
Hard work, the desire to compete, and willingness to try new ideas are important for success.
Economic freedom ensures buyers and sellers to enter and exit the market as they choose.
This freedom to enter or leave a market gave rise to the term free market economy.
In this economic system businesses and individuals decide what to produce and buy and the market determines quantities sold and prices.

8. Capitalism Continued
According to Smith, government is to avoid interfering in the economy.
Thus national and state governments play a minor role of acting as the rule maker and umpire.
Smith used the term laissez-faire to imply that there should be no government interference in the economy

9. ADVANTAGES OF CAPITALISM
Competition between different firms leads to increased efficiency as firms do whatever is necessary to lower their costs.
Most people work harder - The threat of losing one’s job is a great motivator.
There is more innovation as firms look for new products to sell and cheaper ways to do their work.( survival of the fittest aspect).
Foreign investment is attracted as word gets out about new opportunities for earning profit.

10. Advantages Continued
The size, power and costs of the state bureaucracy is reduced as various activities that are usually associated with the public sector are taken over by private enterprises.
Many people quickly acquire technical and social skills and knowledge needed to function in this new economy.
A great variety of consumer goods became available for those who have the money to buy them
A higher GDP – they produce more.

11. Disadvantages of Capitalism
No provision of merit goods like education and health - so the poor will be deprived of the merit goods - the rich becomes richer and the poor becomes poorer
There is no provision of public goods like street lighting, army and police since it’s not profitable to produce and consumers are not willing to pay for them.
Economic instability

12. Disadvantages continued
Over consumption of demerits of goods ( drugs, cigarettes and alcohol), if consumers have a high preference for these goods and if they are profitable to produce.
Social costs ignored private firms ignore negative externalities (e.g pollution).
Wastage of resources

13. Command Economy
This is an economic system in which the government decides what goods and services will be produced and who owns and controls the major factors of production.
Founders of this economic system argued that a market economy exploited the masses by building up profits that benefited the minority at the expense of the majority.
The answers to the basic economic questions are determined through the centralized government planning.

14. Command Economy Ctd
Today two types of economic systems serve as examples of command economies and these are:
Communism and
Socialism
( Source: Pride, Hughes and Kapor 2008).

15. Communism
If Adam Smith was the father of capitalism, then Karl Marx was the father of communism.
Karl Marx advocated a classless society whose citizens together owned all economic resources.
All workers would contribute to the communist society according to their ability and would receive their benefits according to their need.

16. Communism Thus the govt owns almost all economic resources.
Emphasis is placed on the production of goods the govt needs rather than on the products that consumers might want.
Therefore there are frequent shortages of consumer goods.
Workers have little choice of jobs, but special skills or talents seem to be rewarded with special privileges.

17. Socialism
In a socialist economy, the key industries are owned and controlled by the govt.
Such industries include transportation, communications, banking and industries producing important materials such as steel
Land, buildings and raw materials may also be the property of the state.
Private ownership of smaller businesses is permitted to varying degrees.

18. Socialism Ctd
People may usually choose their own occupations but many work in state owned industries.
What to produce is determined in accordance to national goals, which are based on projected needs and the availability of resources.
The distribution of goods and services is also controlled by the state to the extent that it controls taxes, rents and wages.

19. Socialism Ctd Professed aims of this economic system are:
The equitable distribution of income,
Elimination of poverty
Distribution of social services to all who need them
The elimination of the economic waste that supposedly accompanies capitalistic competition.

20. Socialism Ctd The disadvantages of socialism include:
Increased taxation
Loss of incentive and motivation for both individuals and business owners

21. Advantages of a Command Economy
Maximizes the continued utilization of resources.
Distributes wealth equally among all people so there are no inequalities. Government tries to eliminate all private property so that no one is in poverty.
Only products that are required are produced- prevents production of socially undesired products.
Such economies are very stable.

22. Disadvantages of a Command Economy
Lack of innovation.
Cannot detect consumer preferences accurately.
Overstaffing problems
Poor product quality.
Lack of efficiency.
There is little reason for innovation, hard work and quality of the work.

23. MIXED ECONOMY
It combines elements of both the command and the free market economies in one cohesive system. Thus there is a combination of public and private ownership of the major means of production.
Individuals or groups of individuals can invest money in certain types of businesses
Government provides for the general welfare of its people.
Government plays an active role in the economy wherever and whenever necessary to ensure economic strength and social justice.
Thus both free market and regulatory forces are at work.

24. Advantages of a Mixed Economy
The advantages depend on the ratio of capitalistic elements as compared to elements of the planned economy that exist.
1. People may go into business for themselves and decide what they will produce or sell and set their own prices.
2. Business owners pay taxes but they reap the benefits of those taxes through social programs, roads and other infrastructure elements and other government services.

25. Advantages continued
3. Mixed economies have more active government support and direction.
4. All national resources are utilized under a mixed economy.
5. There is a relatively wider tax base.
6. Consumers are protected from consumption of harmful products.
7. There is a considerable degree of consumer sovereignty.
8. High quality products and services due to competition.

26. Disadvantages of a Mixed Economy
The disadvantages of a mixed economy really depend on how “mixed” the economy is, eg if it is mixed more towards a free market, there is little regulation, but if it mixed more towards a command economy, the control may stifle growth.
Mixed economies can also have different characteristics eg mixed economy A maybe high tax, low regulation, while mixed economy B might be low tax and high regulation. Each of these will share a different part of disadvantages.

27. Disadvantages Ctd
A will stifle profits due to its high tax structure but will encourage new ideas due to its low regulations (this could result in an economy comprised almost solely of small well niched businesses).
B will encourage profits but due to its regulations some new ideas (and some growth) will be stifled eg if environmental regulations are strict, the building of new plants might be lowered.

28. Disadvantages Ctd
Its efficiency property reduces in progressively high degree, the more its mixed nature embraces more and more of government / state intervention and state planning and reduces the reliance on competitive market economic management mechanisms.
Mixed economic systems often tend to encourage more state monopolies, making the government the overwhelmingly large economic player as compared to corporate or individual entities.

29. Disadvantages Continued
A mixed economic system has a natural tendency to move further and further away from reliance on competitive market mechanisms to greater and greater bureaucratic controls and interventions until the system efficiency goes down to zero and the systems breakdown or dictatorships get fairly established to hide inefficiencies and remove all economic and political freedom from citizens.

30. Disadvantages continued
Mixed economic systems often turn into closed economies hindering international trade and globalization and depriving citizens from the benefits of an interdependent world economy.
Mixed economic systems incentivize corruption and politically influential people enjoy at the expense of the citizens.
A mixed economic system delivers neither efficiency goals achievable through a competitive market system nor do they bring about fast reduction in poverty incidence in socialistic societies.