Systems

DISCUSSION 1. What types of economic systems do you know?

2. Which of them do you consider to be the most effective one? Why?

SECTION A. Types of Economic Systems. Planned Economy.

reading ECONOMIC SYSTEMS

An economic system is a particular kind of social system. Economic systems differ and change due to social, historical and cultural forces, the level of economic development and various environmental factors of a society. Traditionally, economic systems have been classified using ideological frameworks such as feudalism, capitalism, socialism, and communism. These definitions have centred around the ownership of the means of production ignoring a host of issues such as information mechanisms, behavioural rules and incentives, decision-making systems and property rights. It is more appropriate to think of an economic system as a set of mechanisms and institutions for decision-making and for the implementation of decisions concerning production, income, and consumption within a given geographic area.

To put it differently, an economic system involves the interaction of organisations of economic participants (individuals, households, firms, government) engaged, according to rules and orders, in the production, distribution, and the consumption of goods and services. It may be viewed as a set of arrangements to solve the basic economic problem of:

• what shall be produced?

• in what quantity?

PART I. ECONOMICS

• how shall it be produced, including institutions and resources to be
used,and

• how shall the goods and services to consumers be distributed.
Therefore, the functions of an economic system may be defined as fol­
lows:

a) to match supply to the effective demand for goods and services in an efficient manner;

b) to determine what goods and services are to be produced, and in what quantities;

c) to distribute scarce resources among the industries producing goods and services;

d) to distribute the products of industry among members of the community;

e) to provide for maintenance and expansion of fixed capital investment;

f) to fully utilize the resources of society.

There are a number of ways in which a government can organize its economy and the type of system chosen is critical in shaping environment in which businesses operate.

An economic system is the way in which a country uses its available resources (land, workers, natural resources, machinery etc.) to satisfy the demands of its inhabitants for goods and services. The more goods and services that can be produced from these limited resources, the higher the standard of living enjoyed by the country's citizens.

There are three main economic systems: planned, market and mixed.