2. Economic Systems How are resources allocated?

3. Topic Plan Scarcity The Market economic system The Command economic system The mixed economy Market Vs Command systems

4. Economic Systems The way a nation is organised to respond to the problem of scarcity Different economic systems use different methods to answer the Basic Economic Questions : –1. What to produce –2. How to produce –3. For whom to produce

5. Unlimited Needs and Wants Scarce Productive Resources Relative Scarcity Basic Economic Questions The Need for an Economic System

6. Types of Economic Systems The Market economy The Command economy The Mixed economy

7. 1. Market Economies Also called capitalist or private enterprise systems. Features are: Productive resources are mainly owned by private individuals.

8. Features of market economies (cont.) Economic decision making is decentralised (i.e. decisions are made by individuals ) and the level of government intervention is low. Economic motivation is self interest (e.g profit motive)

9. Features of market economies (cont.) Price is major criterion to allocate goods and resource ( price system/mechanism ). Efficiency is valued or rewarded.

10. 2. Command Economies Also called socialist or centrally planned economies. Features are: Productive resources are owned mainly by the state or the government.

11. Features of command economies (cont.) Economic decision making is made by a central authority or the government Goods/services are distributed to benefit the state as a whole, rather than individuals

12. Features of command economies (cont.) Non-price mechanisms such as queuing, rationing coupons are used to allocate goods among people. Equity is valued.

13. 3. The Mixed Economy All modern economies are said to be a mixture of- market forces ( price system ) and - government intervention In the past, major examples of centrally planned economies were the former USSR and China. These now have allowed levels of market forces to operate

14. Economies in Transition The ll-Out?Approach Examples: Poland, East Germany, Russia, Czech republic Rapid price and trade liberalisation –immediate opening of markets –privatisation of most state owned enterprises –reform of tax, legal and financial system

15. Economies in Transition The Phased approach Example: China 1978 Opening the doors to joint ventures gradual price liberalisation Agricultural reform Reform of state run enterprises Relaxed restrictions on on-state?industrial firms (eg collectives, local government)

16. Market Vs Command Systems Advantages of market systems –eg: economic freedom, efficiency etc Disadvantages of market systems –eg: unequal distribution of income and wealth Advantages of command systems –eg: Equity ( in theory ) Disadvantages of command systems –eg: inefficiencies and waste

17. ?McGraw-Hill Book Company Australia, 1999PPS t/a Economics for Business 2/e 2-16 The End