By Himashi De Mel BA (Hons),CIMA Passed Finalist

“No economy ever stands still.” Sir Roy Harrod, The British Economy

Definition of Economy

The large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated.

Source : Investopeida

Economic Systems

An economic system describes how a

country’s economy is organized.

Due to scarcity, every country needs a system

to determine how to use its productive resources.

Scarcity = Excess of human wants over what can

actually be produced to fulfill these wants

Economic Systems

Therefore, a society/economy

must answer 3 questions…

What to produce?

How to produce?

Whom to produce?

Economic Systems

What to produce?

What kind of goods and services should be produced?

How to produce?

What productive resources are used to

produce goods and services?

Whom to produce?

Who gets to have the goods and

services?

Types of Economic Systems

Traditional Economy

Command Economy

Market Economy

Mixed Economy

• An economic system in which economic decisions

are based on customs and beliefs.

• People will make what they always made & will do

the same work their parents did.

• Exchange of goods is done through ‘bartering’

(trading without using money).

Traditional Economy

What to produce?

People follow their customers and make what their ancestors made.

How to produce?

People grow and make things the same

way that their ancestors did

Whom to produce?

People in the village who need them

Traditional Economy Examples

Australian Aborigines

Mbuti in Central Africa

Inuit of Northern Canada

Traditional Economy

Advantages Disadvantages

Less uncertainty : Everyone knows what

role to play

Tend do discourage new ideas and new

ways of doing things

Life is generally stable & predictable Lack of progress & as a result lower

standard of living

Command system

• Government makes all economic decisions & owns most of the

property and other resources.

• Governmental planning groups determine such things as the

prices of goods/services & the wages of workers.

Command system

How to produce?

Governments decide how to make goods

and services

Whom to produce?

Whoever the government decides to

give them to

What to produce?

Government makes all economic decesions

Command system

Countries with communist governments have Command

economies.

Examples:

There are no truly pure command economic systems, but close

countries are: North Korea, former Soviet Union, Cuba.

*Germany and Russia have moved away from having a Command

economy since 1991. Now they have a Mixed economy

Command Econmy

Advantages Disadvantages

In a complete command economy it is

possible to guarantee everyone a job.

Lack of investment

There is no uncertainty (people are told

when and how to work).

No incentive to productivity

Government will decide the distribution

of income.

Wastage of resources

Black markets

Free Market Economy

An economic system in which production and distribution

questions are answered by prices and profits (supply and

demand).

Most of the resources are owned by private citizens.

Economic decisions are based on Free Enterprise

(competition between companies).

Govt. does not tell a business what goods to produce or

what price to charge.

Free Market Economy

How to produce?

Businesses decide how to produce goods.

Whom to produce?

For consumers

What to produce?

Businesses base decisions on supply and demand and free enterprise (PRICE).

Free Market Economy

There are no truly pure Market economies, but the

United States is close.

Free Market Economy

Advantages Disadvantages

Adjusts to change based on consumer

wants.

Poverty: only those with money can

participate.

High degree of individual freedom.

Wide variety of available goods & services

Market does not provide for people’s

basic needs. Governments must attempt

to do this (think Katrina, Minneapolis

bridge, etc.).

Low levels of government interference.

High degree of uncertainty people lose

jobs, businesses fail.

Because individuals (with money) make

the decisions, everyone (with money) has

a voice in the way the economy runs.

Many choices = high degree of consumer

satisfaction.

Greed based system puts profit before

people (think about the loss of

manufacturing jobs in different parts of a

country. What caused it?).

Moving from MARKET ECONOMY to

MIXED ECONOMY………..

In a truly free market economy, the government would not be involved at all…

There would be no laws to protect workers form unfair bosses.

Many societies have chosen to have some rules to protect consumers, workers, and businesses (MIXED)…

These rules reduce the freedoms that businesses have, but they also protect the workers and consumers

Mixed Economy

Market+ Command = Mixed

Mixed Economy

There are no pure command or market economies.

To some degree, all modern economies exhibit characteristics

of both systems and are often referred to as mixed economies.

Most economies are closer to one type of economic system

than another.

Businesses own most resources and determine what and

how to produce, but the government regulates certain

industries.

Mixed Economy

How to produce?

Businesses, but the government regulates

certain industries

What to produce?

Businesses decide

Whom to produce?

For consumers

Mixed Economy

Most democratic countries fall under this category…

(there are no truly pure Market or Command

economies).

Examples: Sri Lanka, Brazil, Mexico, Canada, UK, US, Germany,

Russia, Australia, etc

Economy Continuum