Unit-14

Economic system

Table of content
 Concept of economy system and it’s functions
 Important features of capitalistic, socialistic
and mixed economy
 Economic system

• According to Peterson “ An Economic system is a set

of arrangement through which a society mobilizes its
resources and technologies to produce goods and
service necessary to satisfy it’s wants”
• According to Loucks “ An Economic system is
consists of those institution which a given people or
given nation has chosen or accepted as the means
through which resources are utilized for the
satisfaction of human wants”
 Function of economic system

• Determine what to produce, how to produce and for

whom to produce ( i.e fundamental problems of
economic system)
• Makes allocation of resources
• Makes balance between consumption and production
• Makes distribution of final product
• Determine price of factor of production
 Types of Economic system

• Capitalism (market economy)

• Socialism (fixed economy)
• Mixed economy
 Capitalism

• Capitalism is a system of economic organization

characterized by the private ownership and use of
capital with profit motive.
• The most important feature of capitalism is the
existence of private property.
• Every one has the freedom to form any firm
anywhere he likes, produce goods, sell it on their own
interest.
• It is based on the doctrine of laissez faire which
would mean that the state interference in economic
activity should be kept down to the minimum
 Main Features of Capitalism
• Price mechanism: In the absence of external
interference, the prices in a capitalist economy are
determined in accordance with the movement patterns
of demand and supply.
• Freedom of enterprise: The citizens are free to choose
the occupation or profession based on his capability
and liking. They can use their means of production as
per their preferences.
• Competition: The number of competitors is high
because of the presence of market economy and price
mechanism. Moreover, individuals can choose ways
of using their means of production and with no
restrictions on the profit motive.
• Profit orientation: All the economic activities are profit
driven.
• Sovereignty of the consumer: ‘Customer is king’
principle prevails in a capitalist economy. Since the
consumer, through his choices, decides on the demand
and supply in the market, his satisfaction is given the
utmost care.
• No government interference: The role of the
government is protecting its citizens from foreign
invasion, acts of terrorism and ensuring law and order in
the state. It does not interfere in the economic activities.
 Merits of Capitalism

• Economic freedom Equal right to work

• Right to accrue wealth
• Rich choice of goods and services
• Encouragement to success and hard work Consumer
as prime focus
• Quality production
 Demerits of Capitalism

• Disproportionate sharing of wealth

• Neglect of public welfare
• Risk of Ruthless competition
• Discord between the haves and have-nots.
• Consumer sovereignty becomes a myth as most of
the consumption choices are directed by
advertisement
 Socialism

• Socialism is an economic system in which the

means of production (capital, equipment,
buildings and land) are owned by the state.
• The main aim of socialism is to run the
economy for social benefit rather than private
profit
 Communism

• Communism is a form of socialism.

• Communism means an idealistic system in which all
means of production and other forms of properties are
owned by the community as a whole, with all
members of the community sharing in its work and
income.
• People are supposed to work according to their
capacities and get according to their needs.
• The aim is to create a classless society
 Main Features

• Social or collective ownership: All means of

production are socially owned and utilized by the
government. No individual ownership in any form is
encouraged. However, an individual can hold private
property as is necessary for his subsistence.
• Central planning authority: Based on a survey of
available resources (human and physical), a central
planning authority established by the government .
Accordingly, an exhaustive plan is made in pursuit of
the pre-determined goals. The planning authority
prepares plans for the economy as a whole.
• Government control: It is present in all the economic
activities and also in the central planning. Plans of
the central planning authority are carried out only
with the approval of the government.

• Social welfare: Driven by the noble pursuit of

securing social welfare of all its citizens, the
government at times carries out such economic
activities that may not be profitable. This is done to
realize the dream of ‘well-being of one and all”
 Merits of Socialism

• Optimum usage of economic resources

• Better way out to basic problems
• Lesser cyclical fluctuations
• Rapid, balanced economic development Equitable
distribution of income
• Better equipped to face economic crisis
 Demerits of Socialism

• End of consumer’s sovereignty

• No importance to personal efficiency and
productivity
• Difficulties in the right implementation of the plan
 Mixed economy
• It is neither pure capitalism nor pure socialism but a
mixture of the two.
• In this system, we find the characteristics of both
capitalism and socialism.
• Both private enterprises and public enterprises
operate mixed economy.
• The government intervenes to regulate private
enterprises in several ways.
• Generally, the basic and heavy industries like
industries producing defense equipment's, atomic
power, heavy engineering goods etc. are put in the
public sector.
• On the other hand, the consumer goods industries, small
and cottage industries, agriculture etc. are assigned to the
private sector
• The mixed economy aims at achieving the goals of both
capitalism and socialism (i.e., efficient use of resources
and equitable distribution of income and wealth) and at
the same time, it emphasizes on the reduction of evils of
capitalism and socialism.
.
 Main Features
• Partnership of the private and public sectors: The
public sector strives for the betterment of the interests
of the common man, works towards more equitable
distribution of income and promotes its ideals of a
welfare state. The private sector too is given a
specific responsibility.
• Planned economy and government control: Focusing
on economic development, periodical plans for the
nation are made by the Government to be adhered to
by both the sectors. To reach the set destination and
uphold social welfare, the private sector is regulated
and controlled by the government.
• Private property and economic equality: Having
permitted right to private property, the government
through a well-planned mix of laws, taxes and
welfare programmes ensures fair distribution of
income and wealth.

• Price mechanism and regulated economy: While the

prices of some essential commodities, are in the
hands of the public sector, the price mechanism also
exists.
• Profit motive and social welfare: It is again a
combination of objectives of capitalist and socialist
economies. However, if the Government is of the
opinion that any private sector industry is hampering
the progress of the society, nationalization is resorted
to.
 Merits

• Economic freedom and capital formulation

• Competition and efficient production
• Efficient allocation of resources
• Advantages of planning
• Economic equality
• Freedom from exploitation
 Demerits

• Unstable economy
• Constrained growth
• Lack of efficiency
• Corruption