Alternate economic systems and
their principles
An economic system, or economic order is a system of
production, resource allocation and distribution of
goods and services.
It includes the combination of the various institutions
like government, consumers and business.
Every economic system represents an attempt to solve three
fundamental problems:
a)What goods and services shall be produced and in what
quantities?
b) How shall goods and services be produced? That is, by whom
and with what resources and technologies?
c) For whom shall goods and services be produced? That is, who
is to enjoy the benefits of the goods and services
Alternate Economic systems
Traditional economic system :
The traditional economic system is the most traditional
and ancient types of economies in the world.
These areas tend to be rural, second- or third-world
countries
Closely tied to the land, through farming.
Each member of a traditional economy has a more
specific and pronounced role
societies tend to be very close-knit and socially
satisfied.
lack access to technology and advanced medicine.
Social customs, religious traditions, and morals of the
culture play a major role.
The output of production are distributed according to
such traditional criteria as age, sex.
Traditional economies are dominant in primitive,
agrarian societies
All modern-day industrialized economies have
elements of tradition carried down from earlier
generations.
Exchanging gifts,
Rights of seniority,
Sons following their fathers,
Women remaining in the home
are just a few examples of tradition-bound economic
practices present in our economy today.
Traditional economic system
Command Economic system:
Large part of the economic system is controlled by a
centralized power.
Government does everything from planning to
redistributing resources
Government usually owns all the critical industries like
utilities, aviation, and railroad.
CUBA and NORTH KOREA
Advantages of Command Economic
Systems
If executed correctly, the government can mobilize
resources on a massive scale.
provide jobs for almost all of the citizens.
The government can focus on the good of society rather
than an individual.
More efficient use of resources.
Disadvantages of Command Economic
Systems
It is hard for central planners to provide for everyone’s
needs.
This challenge forces the government to ration because
it cannot calculate demand
There is a lack of innovation since there is no need to
take any risk.
Workers are also forced to pursue jobs the government
deems fit.
c) Market Economic System
A market economy is an economic system in which the decisions
regarding investment, production and distribution are
guided by the forces of supply and demand.
In this type of economy, there is a separation of the government
and the market.
This separation prevents the government from becoming too
powerful
Hong Kong and Singapore are considered an example of a free
market society.
Role of government in a market
economy
The government should play a role in overseeing the
working of the economy
Should not intervene in its day to day functioning.
The government provide goods and services which
have high social priority but very low profit margin.
Government invests in social infrastructural projects
ensuring economic development of the nation
The government should make the overall rules and
regulations which are binding on the private sector
The government uses its fiscal policy tools to keep the
economy functioning smoothly.
Characteristics of a Market Economy
Private Property: Most goods and services are
privately-owned.
Freedom of Choice. Owners are free to produce, sell, and
purchase goods and services in a competitive market.
Motive of Self-Interest. Everyone sells their goods/sevices
to the highest bidder
Competition. The force of competitive pressure keeps
prices low.
System of Markets and Prices.
All buyers and sellers have equal access to the same
information
price changes are pure reflections of the laws of supply and
demand.
Limited role of Government.
Ensures that the markets are open and working.
Makes sure no one is manipulating the markets
Everyone has equal access to information.
Advantages of a Free Market Economy
Consumers pay the price they want to,
Businesses only produce profitable goods and services.
There is a lot of incentive for entrepreneurship.
This competition for resources leads to the most efficient
use of resources.
Businesses invest heavily in research and development.
Disadvantages of a Free Market
Economy
Due to the fiercely competitive market, businesses will
not care for the elderly or disabled.
lack of focus on societal benefit
Consumers can also be exploited by monopolies.
4) Mixed Economic System
This economic system is a cross between a market
economy and command economy.
The market is more or less free of government
ownership
The government is also usually involved in the
regulation of private businesses.
Characteristics of mixed economy:
(i) Co-existence of Private and Public Sector:
(ii) Personal Freedom:
Under mixed economy, there is full freedom of choice
of occupation, consumption and information.
(iii) Private Property is allowed:
In mixed economy, private property is allowed.
(iv) Economic Planning:
In a mixed economy, government always tries to promote
economic development through economic planning.
(v) Price Mechanism and Controlled Price:
Under this system, free market price mechanism and regulated
price mechanism operate simultaneously.
(vi) Profit Motive and Social Welfare:
In mixed economy system, there are both profit motive and social
welfare motive
(vii) Check on Economic Inequalities:
In this system, government takes several measures to
reduce the gap between rich and poor through
progressive taxation on income.
Advantages of Mixed Economies
There is less government intervention .This results in
private businesses that can run more efficiently
The government can intervene to correct market failures.
Governments can create safety net programs like healthcare
or social security.
In a mixed economy, governments can use taxation policies
to redistribute income and
reduce inequality.
Disadvantages of Mixed Economies
Too much government intervention
A common problem is that the state-run industries run
into large debts because they are uncompetitive.
