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A problem of every economy is scarcity. Scarcity is the very reason why economics as a subject of study was formed, for scarcity is the base or foundation of it all (the study of economics). Scarcity in terms of economics can simply be defined as resource(s) being “limited in supply”; this is because human wants are unlimited while resources are limited. For this reason resources must be allocated effectively in order to prevent wastage, this presents a problem for economists (hence the study of economics) and brings these basic questions to the fore, namely;
What to produce
How to produce
Who to produce for
These are the guidelines economists use to maximize the limited resources for the unlimited wants of man. Economic systems are therefore formed with their function being to determine the allocation of resources.
IDENTIFICATION OF BASIC ECONOMIC SYSTEM
There are three basic economic systems, namely;
Free market economy
FREE MARKET ECONOMIC SYSTEM
Its other names include capitalist/free enterprise/laissez-faire economy.
In this economic system resources are allowed to be owned and controlled by private property owners, private firms and individuals, these entities have the right to compete for economical gain. Since resources are controlled in such a way the market forces; demand and supply determine resource allocation as opposed to being restrained by the government whose only role in this economic system is to protect individuals and grant rights to control resources through legislation and awarding of contracts.
Features of free market economy include:
Individuals have the right to own resources
Price is determined by the market forces (price mechanism)
There is competition within the market
There is little or no government intervention
The laissez-faire (let-us-be) philosophy is employed
There is a usually a large gap between the rich and poor
Individuals have the right to vie for economical gain
Consumers are ripe for exploitation
Price is unstable because of chance of inflation, competition and other related factors
Consumers have freedom of choice
Large rate of innovation due to competition
Social benefits e.g. healthcare and education are only available if it can be afforded
Freedom of choice for consumer
A good example of a country that employs free market economy system is the United States of America.
COMMAND ECONOMIC SYSTEM
Its other names include planned economy and controlled economy.
Command economy is the opposite to a free market economy, it can be branded this way because in this economic system resources are owned and controlled by the state/government as no-one (individuals, private firms etc) is allowed to own resources which results in the non-existence of competition for economical gain in such an economy. The state decides what to produce, how much of it should be produced (resources), which resource is of most importance, the proportion of particular resources dedicated to which sector, distribution of output and so on. Also in this market system market forces are not a factor in price determination because the government itself decides on what the price of resources should be (price regulation).
This economic system is characterized by the following:
Individuals and firms don’t have the right to own and control resources
Price regulation is employed instead of price mechanism
This system prevents customer exploitation
There is price stability
Freedom of choice is restricted for the consumer
Minimal specialization and division of labor
There is a good chance that resources will be underutilized because of the government alone decides what to be produced, creating potential for wastage
The government attempts to address wants and needs by deciding what is required.
People are generally of equal wealth
There is no vying for economical gain between individuals and firms
Officials are usually corrupt
The government owns and controls all resources
Examples of countries that employ the command economic system include The USSR (now dissolved), Cuba and North Korea
MIXED ECONOMIC SYSTEM
The mixed economic system is a system that combines free market and command economy policies in a certain ratio. This means the laissez-faire is employed but the government still has significant control over resources. This is the most realistic example of an economic system because no economy is purely capitalist or command. It is believed that a combination of the two systems may lead to the edging out of the many disadvantages that these systems independently bear. Some examples of mixed economy (high degree of government control and consumer freedom) are England and Nigeria.
COMPARISM WITH OTHER ECONIMIC SYSTEMS
FREE MARKET ECONOMIC SYSTEM
PLANNED ECONOMIC SYSTEM
Market forces determine price (price mechanism)
Price is determined by the government (Price regulation)
Individuals and private firms have the right to own and control resources
Individuals do not have the right to own and control resources
Little or no government intervention in economic policy, their role is only to protect individuals and regulate activities through legislation (Laissez-faire)
Government policies oversee and control entire economy
Since individuals are left to vie for economic gain, competition is abundant hence the need for innovation
Innovation is effectively non-existent since the government determines what is needed
The nature of the economy creates a large gap between the rich and poor i.e. the competitive nature results in losers losing and winners winning
In this system the government eradicates competition in order to create equality resulting thereby reducing the gap between the rich and poor
Extreme highs and lows in terms of standard of living
Most people experience equal standard of living (although it is usually collectively low)
Products are usually of very high quality as a result of competition
Manufacturers have no incentive to improve their products since the government dictates what to make resulting in a high probability of the manufacture of below standard products
Economy is very unstable
Economy is very stable
This system dominates most economies around the world (around 80%)
This system is not as widespread covering about 20% of the worlds economies
Economic system gets country involved in international trade and guarantees the best potential utilization of resources
Resources are underutilized since they are only made for home consumption, this also restricts ability to trade internationally
STRENGHTS OF COMMAND ECONOMIC SYSTEM
Consumer exploitation is roundly prevented
There is price stability
There is a relatively lessened gap between the rich and poor (this is in comparison with a capitalist economy)
Essential goods are provided
It provides a minimum standard living
It’s a very stable economy
It’s very flexible in the face of a major problem as the government can react very quickly to the problem since it controls all
There are equal social services and opportunities for all such as healthcare, education
WEAKNESSES OF COMMAND ECONOMY
Specialization and division of labor is low
The consumer does not have freedom of choice
International trade severely restricted since government only aims to create goods for its own country
Underutilization and wastage of resources
Product quality is normally sub-standard
Standard of living is collectively low
Officials are usually corrupt
Innovation is practically useless as the government determines what is required for the economy
These three examples of economic systems are the broadest and best summarise all forms of economic systems in the world. Though some systems may seem utopian when described but they are actually for more complex in nature and bring along many disadvantages along with the advantages they are characterized by. Therefore economic systems are not necessarily picked based on the perception of which one is felt to appears to be better but what the concerned party hopes to achieve within their country.
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