Economic systems: • A Market Economy • A Planned Economy • A mixed economy

Ø Economic systems defined:

An economic system is a system of production, resource allocation, and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community. As such, an economic system is a type of social system. The mode of production is a related concept.

There are three main types of economic systems:

• A market economy

• A planned economy

• A mixed economy

Ø What is a 'Market Economy'?

A market economy is 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 individual citizens and businesses. There is little government intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's economic activity.

Ø Characteristics of a Market Economy: 

A market economy is a type of economic system where supply and demand regulate the economy, rather than government intervention. A true free market economy is an economy in which all resources are owned by individuals

   One of the most important characteristics of a market economy, also called a free enterprise economy, is the role of a limited government.

·    In a market economy, almost everything is owned by individuals and private businesses- not by the government. Natural and capital resources like equipment and buildings are not government-owned..

·        A market economy has freedom of choice and free enterprise. Private entrepreneurs are free to get and use resources and use them to produce goods and services. They are free to sell these goods and services in markets of their choice

·         A market economy is driven by the motive of self-interest. Consumers have the motive of trying to get the greatest benefits from their budgets. Entrepreneurs try to get the highest profits for their businesses. Workers try to get the highest possible wages and salaries

·        Competition is another important characteristic of a market economy. Instead of government regulation, competition limits abuse of economic power by one business or individual against another. Each competitor tries to further his own self-interest. This economic rivalry means that buyers and sellers are free to enter or leave any market.

·        Consumers compete for goods and services. If the supply of a needed good or service is low, the consumer must pay a higher price. Consumers must compete to get goods or services by paying more or going out of their way to buy the products they need or want.

Ø What is a 'Mixed Economic System'?

A mixed economic system is an economic system that features characteristics of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. According to neoclassical theory, mixed economies are less efficient than pure free markets, but proponents of government interventions argue that the base conditions such as equal information and rational market participants cannot be achieved in practical application.

Ø Characteristics of Mixed Economy:

 

The following are the main characteristics of mixed economy:

1. Co-existence of the Private and Public Sectors

Co-existence of the private and public sectors is the outstanding feature of mixed economy. In mixed economy, both public sector as well as private sector industries will be functioning.

2. Existence of Joint Sector

Joint sector is one where both Government and private individuals establish an organization jointly by contributing the necessary capital.

3. Regulation of Private Sector

Under mixed economy, Government exercises strict control and regulation over private sector industries.

4. Planned Economy

The entire economic structure is subject to the planning of the Government. Mixed economy is a planned economy. The planning commission decides the objectives, targets and allocation of resources etc.

5. Private Property

Under mixed economy, private firms and individuals have right to own and use property.

6. Provision of Social Security

Under mixed economy, Government takes steps to provide social security.

7. Motive of Business Concerns

The motive of the business concerns is profit but coupled with the objective of social welfare.

Ø What is a 'Centrally Planned Economy'?

A centrally planned economy is an economic system in which the state or government makes economic decisions rather than the interaction between consumers and businesses. Unlike a  market  economy in which private citizens and business owners make production decisions, a centrally planned economy controls what is produced and the distribution and use of resources. State-owned enterprises undertake the production of goods and services.

Ø Characteristics of a 'Centrally Planned Economy:

The following are the main characteristics of a Centrally Planned economy:

1.     The government makes the economic decisions. This is different from the market economy that we are familiar with, in which businesses decide what they will produce, not the government.

2.     The government controls all aspects of the economic production. In other words, the government decides what goods will be produced and how they will be produced.

3.     The government decides how resources are distributed and used. For example, if the government thinks we need more goods in a particular area, they will make that decision, not the businesses in that area.

4.     The government needs to make the decisions. It is assumed that the needs of the people are not met in a market economy; therefore, in a centrally planned economy, the government controls decision-making.