ECONOMIC SYSTEMS

MARKET ECONOMY & CENTRALLY PLANNED

According to the Annual Teaching Plan (ATP), the learners should learn about the
following sub-topics:
❖ Market economy and centrally planned
- Economic characteristics
- Advantages
- Disadvantages
Definition: An economic system is the way that goods and services are produced
and resources distributed. In essence, it is the method that a country uses its
resources to satisfy the needs and wants of the population.

Types of Economic Systems

There are THREE basic types of economic systems. Each system has its own
advantages and disadvantages.
• Market Economy / Capitalism
• Centrally Planned Economy / Communism
• Mixed Economic System

It is important to remember that the Market Economy and Centrally planned

economic systems do not exist in the real life but only as a theoretical concept. All
countries use a mixture of the Market Economic system and Centrally Planned
Economic system.

Market Economy/Capitalism

The Market Economic system is also known as Market Capitalism or the Free Market
System.

The economic questions of WHAT should be produced, HOW it should be produced

and FOR WHOM it should be produced are all answered through the market forces
of demand and supply.
Characteristics of a Market Economy

• Factors of Production are Privately Owned

The government or state owns very little of the factors of production. Instead,
private individuals and business own the majority of land, capital and labour.

• Government does not intervene

The government only provides essential services such as infrastructure and
defence which are not produced by private firms; other than that it does not
interfere with the economy.

• Profit Motivation
Firms and businesses try to earn the highest profits possible. This results in
very efficient resource allocation. Employees also try to earn highest possible
wages and salaries.
 • Competition
Many firms sell similar products, this allows for higher quality products and
lower prices to attract buyers. If the prices of a seller are too high, buyers will
go to a different seller with lower prices. This prevents buyers from being
exploited.

Buyers also compete for products, this raises the demand and prevents prices
from falling too low and ultimately protects suppliers.

• Individual Freedom
The population is free to start-up businesses and work and live where they
please.

• Specialisation
Firms specialise in producing products on which they earn highest profits.
Goods and services which cannot be produced and sold for highest profits are
bought from other firms resulting in trade.

Advantages of the Market Economic System

• High Economic Growth

Economic growth rates are usually high as business try to increase profit and
production rates. It is Important to remember that economic growth can be low
during downturns in the business cycle.

• High Efficiency
Due to competition between firms, the economy runs very efficiently. Market
Economies try to use the least resources to gain maximum satisfaction for
needs and wants. Competition further ensures that consumer complaints and
problems within firms are dealt with quickly.

• Large Range of Choices

Many firms produce similar products giving consumers a large choice of
products.

• Public Freedom
The public can freely start businesses, live where they want to, own factors of
production and write and say almost anything.

• Innovation
Competition and the drive for higher productivity and profit encourage
innovation. Innovation – the act of inventing a new product or method.
New innovations allow greater productivity and profits.
Disadvantages of Market Economic System

• Market Failure
This occurs when the forces of demand and supply fail to allocate limited
resources to fulfil the needs and wants of the population to the highest
satisfaction possible. An example of this would be when goods and services
are too expensive for the poorer population to buy. The formation of
monopolies can be a direct result of market failure.

• Wealth Inequality
In a Market Economy the majority of the population are usually poor with a
few, very wealthy people. The distribution of income is highly uneven.

• Selfishness
The motivation for profit and wealth often leads to selfishness and a lack of
concern for others.
The economy revolves around materialism; the many factories and industries
do often create pollution and the over-exploitation of resources does harm the
natural environment.

Centrally Planned Economy

In this economic system, the government or state owns and controls all factors of
production and also makes the decisions on what, how and for whom goods and
services are produced for. Ultimately the state controls the economy.

This economic system can also be called the Command System or

Socialism – If capital, natural resources and businesses are owned by the state.
Communism – If all resources are collectively owned by the people of that country.

Characteristics of a Centrally Planned Economy

• No Private Ownership
All resources and land is owned by the government. Individual citizens are not
allowed to own anything. All people of the country share the factors of
production and the goods and services that are produced

• Resources are shared

All people of the country share the factors of production and the goods and
services that are produced

• State Entrepreneurship
Private businesses are not allowed to operate. The state is the only
entrepreneur

• State Control and Planning

The government plans what goods and services to produce and controls the
sales of products in government owned outlets.
Advantages of a Centrally Planned Economy

• Wealth Equality
Income is paid according to the needs of workers and not based upon the
type of work. A street sweeper would receive the same income as a doctor.
This allows for equal distribution of wealth.

• Full Employment
All people of working age are employed by the state. This raises the average
standard of living for the whole of the population.

• Resources are Not Wasted

Competition between rival firms often leads to over production and resource
wastage; however, there is no competition in a Centrally Planned Economy.
The State is the only entrepreneur, this keeps resource wastage to a
minimum as products are only produced when needed.

• Government Services
The government owns and provided all services such as housing, healthcare,
education as well as electricity, water and transport infrastructure.

Disadvantages of a Centrally Planned Economy

• Lack of Freedom
As there is no competition in a Centrally Planned Economy, there is a very
limited range of goods and services offered to consumers. Furthermore,
freedom of speech and movement are often restricted.

• Lack of Motivation
The economy’s workforce has very little motivation to work harder or for being
innovative. Workers cannot lose their jobs when they work poorly or earn
better wages when working harder. This often results in the state having to
use violent force or threat to get the general workforce to increase
productivity.

• Low Economic Growth

The lack of motivation and innovation in the workforce results in very low
economic growth. Workers have no reason to be more productive.

• Shortage of Consumer Goods

In order to increase productivity, the state usually focuses on the production of
capital goods before producing consumer goods. This can lead to many
shortages and rationing of consumer goods such as foodstuffs.
 ❖ SOUTH AFRICA’S MIXED ECONOMIC SYSTEM
- Economic characteristics
- Advantages
- Disadvantages

MIXED ECONOMIC SYSTEM

The Mixed Economic system is a mixture of the Market Economic system and
Centrally Planned Economic system. It aims to combine the advantages of each
system into one economic system: state intervention insures equality while private
business allow for higher economic growth rates and economic efficiencies.

All economies around the world use the Mixed Economic system. However, some
economies have stronger traits of the Market economic system (such as the USA
and South Africa) while other economies have stronger traits of a Centrally Planned
Economy (such as North Korea and Cuba).

Characteristics of the Mixed Economic System in South Africa

South Africa has stronger traits of the market Economic system compared to the
Centrally Planned Economic system.

Some of the characteristics of a mixed economic system are the same as the Market
Economic and Centrally Planned Economic systems. This is due to the fact that the
mixed economic system is a mixture of the two systems.

• Most Factors of Production and Businesses are Privately Owned

Most of the resources in South Africa including the factors of production as
well as many of the businesses are privately owned.

• Competition
Businesses in South Africa compete and produce a wide variety of goods and
services. The state ensures competition is fair by enforcing the Competition
Act.

• Profit Motivation
The South African economy is driven by the desire to earn more money.
Businesses try to run as efficiently as possible to earn maximum profit;
however, the state ensures that workers are not exploited by enforcing
minimum wages and conditions of employment.

• Government Intervention
The government does intervene in the economy to prevent exploitation and
ensure that the economy runs as smoothly as possible.

This is achieved through a number of acts such as the Competition Act,

Labour Relations Act, Basic Conditions of Employment Act and Companies
Act. These Acts make sure that no exploitation in the economy takes place.
 The state also controls wealth equality by using progressive taxation (higher
taxes for higher income earners) and social welfare grants.

Furthermore the state also uses Fiscal Policies to smoothen out the business
cycle in times of economic upturns and downturns and tries to maintain a
stable economic growth rate.

• Essential Products are Provided by the Government

Several firms and business are run by the state in South Africa. These firms
mainly produce essential products such as infrastructure, electricity, security
and basic healthcare.

Some examples of these firms are: SABC, Post Office, SAA, Transet and
Eskom.

Advantages of a Mixed Economic System

• Promotion of Economic Growth

The state usually has polices that are in place to promote the starts up of new
businesses as well as providing good infrastructure which also helps with the
growth of businesses. The promotion of private ownership leads to
competition which ultimately leads to further economic growth.

• Freedom of Choice and Ownership

Any person is allowed to own factors of production or businesses. The many
competing businesses in the economy produce a wide variety of goods and
services for consumers to choose from.

• State improves the standard of living

In a normal Market economy large sections of the population are usually
exploited. This is prevented in the Mixed Economy by the intervention of the
state by providing Social Welfare grants and providing free education and
healthcare.

• Environmental Protection
The state protects the environment by reducing pollution and preventing the
over-exploitation of natural resources. Mixed Economies have better
environmental protection policies than market and centrally planned
economies.

Disadvantages of Mixed Economies

• Selfishness
The motivation for profit can be so strong that people put themselves first and
show no concern for the disabled, poor or for the environment.
 • State Firms are monopolies
State owned firms do not allow for competition. This allows the state owned
firms to produce low quality products and set their own prices. This can lead
to low economic efficiencies in state production.

• Excessive State Intervention

The state can disrupt the economy by exposing high taxes, excessive laws on
worker protection and social welfare spending. Such government intervention
can decrease production, increase unemployment and ultimately lower
economic growth rates.

• Poverty
Despite government intervention and government schemes to raise the
standard of living, poverty is still a major problem. The South African Mixed
economy has a very large gap between wealth distribution between the rich
and the poor.

❖ EFFICIENCY IN DELIVERING SOCIO-ECONOMIC SERVICES

One of the main duties of the state in a mixed economy is to provide social services
to improve welfare especially for the marginalised. The government also has to make
sure that the economy can operate efficiently.
Some of the examples of social services are:
• Education and training
• Health care
• Housing and community amenities
• Social protection (welfare services & social grants)
• Public order and safety