Economic Systems
The Economic Systeme economic system is the organization of the economy to allocate scarce resources. The economy tends to go through periods of faster and slower growth. Businesses prosper when the economy is booming and living standards are rising.
the economic system definition : a set of rules and procedures that control and organize the economic activities to satisfy people wants and needs.
Every society or country must choose and develop its own way of solving these problems “What, how, and for whom to produce?”.
How a country decides what to produce, how to produce and for whom to produce is called its economic system.
So the three main sets of decisions need to be made by the economic system:
what to produce,
how to produce,
for whom to produce.
There are three Economic System Types:
1-A market economy is one in which these decisions are determined by buyers and sellers interacting with each other without government interference.
2-A planned economy is one in which a central planning agency such as the government determines the 3 economic decisions outlined above.
3-A mixed economy includes elements of both the planned and the market economies.
Those (and there are few of these left today) that favour the centrally planned economy argue that the government (central planners) is best placed to meet the needs of all the people of a particular society. Those in favour of the free market argue that central planning wastes resources and that the market makes sure that consumers get what they want producing, while producers supply it at a profit. The reality is that most societies operate some form of mixed economy.
The market economic system
“ Capitalism”
A market is a very important concept in economics. Very simply, a market consists of all those people or firms who wish to exchange a given good or service. Any market for a good or service is therefore made up of all the producers who make and sell that particular good or service and all those consumers willing and able to buy it.
We can say that the market for computers consist of all producers and all consumers of computers. Similarly there is a market for every different type of food, for clothes, televisions, cars, holidays, insurance and all other goods and services.
In economics a market does not refer to a particular location where goods and services might be traded, such as Billingsgate fish market in London, the famous Khan el-Khalili market in Cairo in Egypt, or the local market in a town or village where you live
Market Economy Definition:
An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses (the prices of goods and services are determined by supply and demand ) and there is little government intervention or central planning.
A system in which most resources are owned by individuals and the interaction between buyers and sellers determines what is made, how it is made, and how much of it is made.
All the resources in a market economy are privately owned by people and firms. Every business will aim to make as much profit as possible.
Profit is the amount of money a business makes from selling goods and services less the money it costs to buy or hire resources .
However, a business can only be profitable if it uses the scarce resources to make those goods and services that people will buy.
In a market economic system all firms aim to make a profit and they do this by moving scarce resources away from producing things people will not buy into the production of goods and services that they will buy. That is, firms will move out of markets that are shrinking as people are buying less, into markets which are expanding because people are buying more.
What is produced in a market economy depends therefore on what consumers want and are willing to pay for. Firms will produce what people want in the cheapest possible way so as to make the most profit. The people who are able to enjoy the goods and services produced, however, are only those with enough money to buy them.
How good is the market economic system? (Advantages of the market system)
1. The market produces a wide variety of goods and services to meet consumers' wants
2. The free market responds quickly to people's wants
In the market system if people want a good or service and can afford to buy it, then it becomes profitable to make it and resources are quickly moved to the market to produce such goods and services. On the other hand, if the good is not wanted it becomes unprofitable and resources are directed away into more profitable uses.
3. The market system encourages the use of new and better methods and machines to produce goods and services
The aim of firms in a market economy is to make as much profit as possible. New methods and machines often reduce the costs of producing goods and services allowing firms to increase their profits. For example, the widespread use of computers in banks has enabled bank workers to make calculations much faster so that more work can be done each day.
What is wrong with the market system? -Disadvantages of the market system.
1. Factors of production will be employed only if it is profitable to do so
If a profitable use cannot be found for some of the scarce resources then they will be unemployed. Labour is just another factor of production, and one reason why some people are unemployed today is that it is not profitable to employ them.
2. The free market can fail to provide certain goods and services
Some goods and services are consumed by everyone at the same time but some consumers may be unwilling to pay directly for them even though they may enjoy their use. For example, everyone enjoys the benefits of street-lighting at night but no private firm could provide this at a profit because it would be unable to force people to pay for it. Governments may therefore have to provide such goods and services for the general public
3. The free market may encourage the consumption of harmful goods
Some people may wish to buy dangerous drugs and if they can afford to buy them then the free market will find it profitable to provide these goods. However, such drugs are harmful and it may need a government to pass laws to stop people from selling them and others from using them.
4. The social effects of production may be ignored
Factories bellowing smoke into the air can affect us all. Pollution is causing damage to the natural environment and the destruction of plant and animal life around the world. Also the noise from factories, airports and roads affects people who live nearby. Private firms in a market economy may not consider the social effects of their actions.
5. The market system allocates more goods and services to those consumers who have more money than others
People with a lot of money have the freedom to choose and buy many different goods and services, but for those who have little money, like many unemployed and elderly people, there is much less freedom of choice.
