Khulna university

Business Administration Discipline

MBA Program
Subject: International Business (BA 5215)
Week 5 Lecture, Date: 6 and 8 Aug 2023
Topic: Economic System
Course Teacher:
Dr. ATM Jahiruddin
Professor

Basic economic decisions

• What to produce
• How to produce
• For whom to produce
Few other supplementary decisions
• How much, and
• When
The basic mechanism through which these
decisions are made is called economic system
 Economic system

• The structure and organization of a society's

production, distribution, and consumption of
goods and services
• The method used by a society to produce and
distribute goods and services.
• In practical term, how the government tells us
what we can get and how to get it!

Economic system: types

• Above continuum shows three type:

– Planned or command economy
– Market or free market economy
– Mixed economy
• Another category: Traditional economy
4
 Economic system

Market Mixed Command

USA Great Britain China

• Another category: Traditional economy

Free market economy

• The majority of economic decisions are made by

individuals and private firms.
• The government's role is generally limited to
providing a legal framework, enforcing property
rights, and ensuring fair competition.
• In this system, the allocation of resources, the
pricing of goods and services, and the
distribution of income are determined by the
forces of supply and demand in the market.
 Free market economy

• The majority of economic decisions are made by

individuals and private firms.
• The government's role is generally limited to
providing a legal framework, enforcing property
rights, and ensuring fair competition.
• In this system, the allocation of resources, the
pricing of goods and services, and the
distribution of income are determined by the
forces of supply and demand in the market.

Answer the big three…

• What will be produced?

–Whatever the consumer wants

• How will it be produced?

–Entrepreneurs will respond to demand

• For whom will it be produced?

–Whomever is willing to work for it (or afford it)
 Examples of Free market economy

• List of the free economies according to the

Heritage Foundation's 2022 Index of Economic
Freedom
• Singapore's economy is considered the freest,
• Followed by Switzerland and Ireland
• Canada, South Korea, Singapore, Germany,
Great Britain and USA are the other examples
• Find out the full list from the internet

Government role in free market economy

• Avoid making direct interference in individual
economic decisions
• Adam Smith’s idea of the market as an invisible
hand, guiding the economy’s scarce factors of
production to their best uses
• Maintain fair competition
• Protect property rights
• Ensure the functioning of the market
• Responding to the market failure
• Public goods
Free economy: Advantages and disadvantages
Advantages Disadvantages
• Individual Freedom • Rewards only productive
people
• Lack of government
interference • Workers and businesses
face uncertainty
• Incredible variety to (Competition)
choose from • Not enough public goods
• Innovation and efficiency (Education, health,
• High degree of consumer defense)
satisfaction • Unemployment
• No protection against
market failure

Planned/ Command Economy

• Where the allocation of resources, prices, and
production levels and its distribution are determined
by central planning rather than market forces.
• The government exercises significant control over
economic activities.
• Government decides the needs of the people, the best
way to produce it and for everyone!
Features of Planned/ Command Economy

• State ownership of resources

– The government owns and controls major industries,
resources, and means of production.
• Central planning:
– Government sets production targets, prices, and distribution
of goods and services based on its economic plans.
• Limited consumer choice
– Since production decisions are centrally planned, consumer
choices may be limited compared to a market economy.

Features of Planned/ Command Economy-2

• Absence of competition
– Free entry is restricted by law, the absence of competition
can lead to inefficiencies and a lack of innovation.
• Government control
– The government plays a significant role in economic
decision-making and resource allocation.
• Examples: North Korea, Cuba, Former Soviet Union
 Advantages / disadvantages

Advantages Disadvantages
• Basic Needs taken care of • Doesn’t meet wants
• Education, public health, • No incentives
other services cost very • Requires a large
little if anything bureaucracy
• Very little unemployment • New and different ideas are
• Equality in resource discouraged
distribution and • No room for individuality
consumption • Often leads to inefficiency

Command economy’s response to the big

three questions
• What is being produced?
– Whatever the government decides
• How is it being produced?
– The government will tell someone to make it
• For whom is it being produced?
– Whomever the government decides needs it
 Mixed economy

• None of the pure market and planned economies

rarely exist in their absolute forms.
• Most countries have mixed economies, combining
elements of both market and planned economies.
• Market economies have some level of government
intervention in areas like regulation, taxation, and
social welfare programs.
• Planned economies might have some degree of
market elements in certain sectors or industries.

Mixed economy-2

• Each economic system has its advantages and

disadvantages
• Various countries adopt different economic models
based on their social, political, and cultural values.
• The effectiveness and efficiency of an economic
system depend on a multitude of factors
• Striking the right balance is crucial for ensuring
sustainable economic growth and societal well-
being.
 Mixed Economy
• A mix of all of the other three economies
• Some government involvement, consumer driven,
aspects of economy based on traditional values
• This is really what the US is….
• Examples: Obama Care, Bail outs yet consumer
driven. Family owned stores and corporations.

Mixed Economy
• A mix of all of the other three economies
• Some government involvement, consumer driven,
aspects of economy based on traditional values
• Examples:
– Healthcare in the US
– Bail outs in Europe
Hybrid Systems

Market Social State

Socialism Democracy Capitalism

Create a graphic organizer to help you remember each system

Market Command
Mixed

Traditional
 Aspect that differ different economic
system
• Property right
• Economic Freedom
• Growth
• Stability
• Equity
• Efficiency

Aspects that differ-2

• Property right
– individuals have the right to own their own property,
including business
• Economic Freedom
– Consumers decide how to spend or save their incomes
– Workers are free to choose a career or change jobs
– People are free to establish and close businesses
• Growth
– An increase in the volume of production over time
– Affects the standard of living in a society
 Aspects that differ-3
• Property right
– individuals have the right to own their own property,
including business
• Economic Freedom
– Consumers decide how to spend or save their incomes
– Workers are free to choose a career or change jobs
– People are free to establish and close businesses
• Growth
– An increase in the volume of production over time
– Affects the standard of living in a society

Aspects that differ-5

• Economic stability
– Price stability
• Avoiding inflation, a rise in the average price level
• Avoiding deflation, a fall in the average price level
– Full employment – using all of an economy's scarce
resources (e.g. labor)
• Economic Equity
– Fairness in economic dealings
• Evaluating transactions in the marketplace
• Overall distribution of income
– Criteria for judging equity
• Equal opportunity
• Equal outcomes
Aspects that differ-5

• Economic efficiency
– Not wasting scarce resources
– Two goals
• Produce the goods and services people want most
• Economize resources in the production of goods and
services to minimize the real costs of production