Economic

systems 3
CHAPTER
 Types of economic systems

There are three types of economics systems

1. Command economy
2. Market economy
3. Mixed economy
 Command Economy
 A command economy is where a central
government makes all economic decisions.
 The government owns the land and the
means of production.
 It doesn't rely on the laws of supply and
demand that operate in a market economy
 Characteristics of Command Economy
1. The government creates a central economic plan. It
guides every sector and region of the country. The five-
year plan sets economic and societal goals. Shorter-
term plans convert the goals into actionable objectives.
2. The government allocates all resources according to
the central plan. It tries to use the nation's capital,
labor and natural resources in the most efficient way
possible. It promises to use each person's skills and
abilities to their highest capacity. It seeks to eliminate
unemployment.
 Characteristics of Command Economy

3. The central plan sets the priorities for

the production of all goods and services. These
include quotas and price controls. Its goal is to
supply enough food, housing, and other basics
to meet the needs of everyone in the country.
• It also has national priorities. These include
mobilizing for war or generating robust
economic growth.
 Characteristics of Command Economy
• 4. The government owns monopoly
businesses. These are in industries deemed
essential to the goals of the economy. That
usually includes finance, utilities, and
automotive. There is no domestic competition
in these sectors.
 Characteristics of Command Economy
• 5. The government creates laws, regulations,
and directives to enforce the central
plan. Businesses follow the plan's production
and hiring targets.
Advantages of Command Economy
1. Planned economies can quickly mobilize
economic resources on a large scale. They
can execute massive projects, create
industrial power, and meet social goals. They
aren't slowed down by lawsuits from
individuals or environmental impact
statements.
 Continuation of advantages
• 2. Command economies can wholly transform
societies to conform to the government's
vision. Often the transition is violent. The
previous leadership is often exiled or
executed. The new administration nationalizes
private companies. Its previous owners attend
"re-education" classes. Workers receive new
jobs based on the government's assessment of
their skills.
 Continuation of advantages

3. There is order in the economy, this because

the government ( one arm or body) makes the
key or major decision.
4. The need or vulnerable in society are care for.
Eg the old, the under five children, orphans etc
 Disadvantages of Command Economy
1. This rapid mobilization often means command
economies mow down other societal needs. For
example, the government tells workers what jobs they
must fulfill.
2. It discourages them from moving. But people won't
ignore their needs for long. They often develop a shadow
economy, or black market. It buys and sells the things the
command economy isn't producing. Leaders' attempts to
control this market weakens support for them.
 Disadvantages of Command Economy

3. They often produce too much of one thing

and not enough of another. It's difficult for the
central planners to get up-to-date information
about consumers' needs. Also, prices are set by
the central plan. They no longer measure or
control demand. Instead, rationing often
becomes necessary.
 Disadvantages of Command Economy

4. Command economies discourage innovation.

They reward business leaders for following
directives. They can't do that while taking the
risks required to create new solutions.
5. Command economies struggle o produce the
right exports at global market prices. It's
challenging for central planners to meet the
needs of the domestic market.
 Disadvantages of Command Economy

6. There is a lot of bureaucracy ( a lot of

hierarchy to be followed, respected or obeyed.
This leads to decision taking longer than
necessary.
7. The government fixes or controls the price in
this economy.
Examples of commonly-referenced countries
with command economies
• Belarus - This former Soviet satellite is still a
command economy. The government owns 80
percent of its businesses and 75 percent of its
banks.
• Cuba - Fidel Castro's 1959 revolution installed
Communism with a planned economy. The
Soviet Union subsidized it until 1990. The
government is slowly incorporating market
reforms to spur growth.
Examples of commonly-referenced countries
with command economies
• Iran - The government controls 60 percent of
the economy through state-owned businesses.
It uses price controls and subsidies to regulate
the market. That created recessions, which it
ignored. Instead, it devoted resources to
expanding its nuclear capability. The United
Nations imposed sanctions, worsening its
recessions. The economy should improve when
the 2015 nuclear trade deal ends sanctions.
Examples of commonly-referenced countries
with command economies
• Libya - In 1969, Muammar Gaddafi created a command
economy reliant upon oil revenues. Most Libyans work
for the government. Gaddafi's reforms to create a
market-based economy were halted in 2011. That's when
he was overthrown and assassinated.
• Russia - In 1917, Vladimir Lenin overthrew the Czars.
He created the Communist command economy. Josef
Stalin built up military might and quickly rebuilt the
economy after World War II. The Soviet Gosplan has
been the most studied. It was also the longest running,
lasting from the 1930s until the late 1980s.
 The Market Economy
• Markets
– A market is any arrangement that enables buyers
and sellers to get information and do business
with each other.
– In short, it is an economy which is privately
controlled. This means the private firms or
individuals own the major or strategic raw
materials and make key decisions. Eg what to
produce, what price to charge.
 The Market Economy
– Goods and
services
and factors
of
production
flow in one
direction.
– And money
flows in the
opposite
direction.
 The Market Economy
• Coordinatin
g Decisions
– Prices
coordinate
decisions
in markets.
 Advantages of market Economy

1. Competition leads to efficiency because

businesses that have fewer costs are more
competitive and make more money.
2. Innovation is encouraged because it provides a
competitive edge and increases the chance for
wealth.
3. A large variety of goods and services are
available as businesses try to differentiate
themselves in the market.
 Advantages of market Economy

4. Economic activity is encouraged because you need

money to live and need to engage in economic
activity (through employment or self-employment) to
make money.
5. Freedom of individual choice is possible to the
extent that the market provides options for work,
developing a business, and purchasing goods and
services (so long as you can afford them).
6. Its less bureaucratic hence decision don’t take
longer.
 Disadvantages of market economy
1. Disparity in wealth and mobility exists in market economies
because wealth tends to generate wealth. In other words,
it's easier for wealthy individuals to become wealthier than it
is for the poor to become wealthy.
2. Environmental damage results with no government
regulations because it's usually more expensive to produce
in an environmentally-sound manner, which reduces profits.
3. There tends to be a reduced social safety net, including such
programs as unemployment insurance, Social Security, and
Medicare, because these programs are supported through
taxation.
Disadvantages of market economy
4. The needy or vulnerable are neglected. This
is because the key players (private firms and
individuals) are there to make profits.
5. IT can lead to market failure in the long run.
Examples of market failure include inflation,
which can be defined as the persistent or
continuous rise in the general prices of goods
in an economy.
 Mixed Economy
• A mixed economy is defined as
an economic system consisting of a mixture of
either markets and economic planning, public
ownership and private ownership.
• In short, the government and private firms or
private individuals work together.
 Characteristics of mixed economy

• One main characteristic of a mixed economy is the

ownership of goods by both private and
government/state-owned entities. Monopolies have
the potential to occur in this type of economy, but the
government closely monitors this. For the economy to
be mixed, the government can control some parts but
not all. For example, the government may control
health care and/or welfare in some mixed economy
countries.
 Advantages of mixed economy
• 1. It promotes a quick economic development.
In this type of economic system, both the public and private
sectors can operate equally, which means that economic
development will be quicker. This is especially true
considering that economic resources will be utilized
efficiently. Also, depletion of resources will be slowed down.
• 2. It creates a balance in regional developments.
The planning commission of a country will be able to create
policies for the improvement of every region. In addition,
the government would also try to develop each sector of the
population.
 Advantages of mixed economy
• 3. It encourages lesser income inequality.
With a mixed economy, there will be lesser inequality when it
comes to income, where the inheritance law is applied to
enable members of society to become richer. As for the public
sector, it would try to provide economic utility to the general
public, leading to further reduction of inequality in income.
• 4. It provides the freedom to own a private property.
People are free to obtain property in a mixed economy, which
means that the idea to work even more will be encouraged.
Again, this will help in the fast economic development,
especially in the areas of industries and agriculture
 Advantages of mixed economy
5. There is order in this economy. This is
because the arm of the government is
involved.
6. The needy are cared for. This is due to the
fact that the social welfare part of
government is involved.
7. Innovations are encouraged.
 Advantages of mixed economy
8. Less bureaucratic
9. There is competition
10.There is variety of goods being produced.
This is because the government has given the
private firms and private individual to decide
what to produce, how to produce but the
government is watching.
 Disadvantages of mixed economy
• 1. It brings about the fear of nationalization.
As the private and public sectors coexists, the government would
have the ability to own and nationalize any industry. This means
that private entities will have to stay on the psychological
apprehension that their business would be nationalized or taken
over by the government.
• 2. It could risk the government to go too far.
In a mixed economy, determining the exact role of the
government in the private sector would sometimes become a
guessing game that would result to unfair practices in both sides.
It is believed that the government would manage the economy
poorly, so its involvement is usually regarded as inappropriate.
 Disadvantages of mixed economy
• 3. It observes lesser use of resources.
While the interest of the society is important in this system, it
also hinders maximum use of available resources. This is
primarily because of the government trying to mobilize
resources to produce products and services that are generally
beneficial for society, rather than doing it for the betterment
of the economy.
• 4. It can lead to higher taxes.
With more state intervention in the economy, it would mean
that the government would invest more and would get their
funds largely from tax revenues. More taxes would be required
from the people, which can lead to negative consequences
 Disadvantages of mixed economy

5. Sometimes, there is conflict of interests

between the private firms or private individuals
and the government. This is because in many
cases, the government has an upper hand over
what is being done in the economy.
End of lecture