THE TYPE AND ROLE OF THE ECONOMY
Economies differ in the way that they divide their economic resources, such as land, labour and capital, between competing uses. Resources that are allocated to a particular use cannot be used for something else at the same time. For example, you cannot build on land which is being used for agriculture and people who are employed to make cars cannot be employed at the same time in the retail industry. In order to decide how to allocate resources, all economies must find the answers to three basic questions which relate to the production and distribution of goods and services: -what should be produces? -how should it be produces? -for whom should it be produced?
Not all countries have the same method of organising their economy. One way of examining the difference between economies is to measure the amount of influence the government has on decision making. This has given way to three major economic system: -the free market system, -the mixed system, -the centrally planned system.
The free market system
Also know as the capitalist system or the
laissez-faire system. With the free market system, resources are privately
owned; production decisions are made by entrepreneurs and private individuals
and there is no government interference of any kind. The price mechanism is its
main feature; prices of goods and services are determined by demands made by
the consumers and by the willingness of producers to supply these goods and
services. No country in the world has a completely free economy. The
-Incentive: People have the incentive to work hard because opportunities exist to become very rich; -Choise: People can spend their money in the way they want to; they can set up their own company or choose to work for someone; -Competition: competition stimulates new ideas and processes, which leads to the efficient use of resources . Successful producers are able to use factors of production more efficiently and supply their own products at lower prices for the consumers.
-Unequal distribution of wealth: there is an unequal distribution of resources: consumers with more money have more influence and the poorest consumers may not have their basic needs provided for. -Public Serivices: the price mechanism may not work efficiently where services such as defence, education and health services need to be provided; -Profit motive: in order to get more profit, producers may ignore the social costs of production, such as pollution; -Wasted ore reduced competition: advertising in a free market is very powerful and some firms may use it to sell "new" products which are basically the same as many other products currently on sale. In addictions, some large companies may monopolise production and keep prices artificially high.
The planned system
also known as the command system or the collectivist system. It is at the opposite end of the scale to the free market system since it relies exclusively on the State:
The government decides what is made, how and where it is made, how much of it is made and how distribution takes place.
The resources, the factor of production, are controlled by the government on behalf of producers and consumers. Price levels are not determined by the forces of supply and demand, but are fixed by the government. Planned economies can be successful when there is a single agreed aim.
The system, however, is not so successful when consumer desires and wants are great, as they are throughout the world today. therefore since 1992, many countries with planned economies have switched towards greater use of the price mechanism.
-Use of resources: central planning can lead to the full use of all factors of production, so reducing or ending unemployment; -Large-scale production: economies of scale (that is the unit cost saving that are made as firms grow in size) become possible due to mass production; -Public sevices: such as the supply of domestic power or defence can be provided through central planning; -Basic sevices: there is less concentration on making luxuries and greater emphasis on providing a range of basic goods and services for the whole population; -More equal distribution of wealth: there are less dramatic differences in wealth and income than in a free market economy
-Lack of choise: consumers have little influence over what is produced and have little say in what they do as a career; -Low level of incentive: since there is no competition there is no great incentive to improve existing systems of production or work. As a result production levels are not as high as they could be and the quality of the products suffer; -Centralised control: because everything is centrally planned al lot of paperwork needs to be completed. This is known as "bureaucracy" and means that the cost of running a planned system is high and decision making is slowed down; -Black market: this happens when the planned economy fails to produce enough goods; individuals who manage to obtain these goods sell them at high prices
The mixed economy
Mixed economies have features of both the free market and planned system. The government operates and controls the public sector, which typically consist of a range of public services such as health and education, as well as some local government services. A system in which some resources are controlled by the State and some by private firms and individuals.
The private sector is largely governed by the price mechanism and market forces, although in practice it is also controlled by various regulations and laws regarding pollution, safety, employment,.
Most modern western countries have mainly market economies. the USA is a typical example of a largely market-based society, but its government still plans certain areas of the economy, such as defence, and provides very basic medical care for those who cannot afford medical insurance.
-Best of both worlds: The mixed economy combines the best elements of the planned and free market; -Necessary services are provided: the government provides a "safety net" for the weaker members of the society who are unable to provide for themselves; -Incentive: Since there is a private sector where individuals can make a lot of money, incentive still exists in the mixed economy; -Competition: Price of goods and services in the private sector are kept down through competition
Worst of both worlds: the mixed economy suffers from the disadvantages of both planned and market system; -Regulations and restrictions: the government interferes with initiative and enterprise by imposing restrictive laws.
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