The way a country’s resources are owned and the way that country takes decisions as to what to produce, how much to produce and how to distribute what has been produced determine the type of economic system that particular country practises.
1. MARKET ECONOMY (also called FREE ENTERPRISE ECONOMIES or CAPITALIST ECONOMY) 2. CENTRALLY – PLANNED or CONTROLLED ECONOMY
3. MIXED ECONOMY
1. MARKET ECONOMY
in comparison to
2. PLANNED ECONOMY
e.g. USA, Japan
Private firms or individuals own means of
production. They make choices about:
o What to produce
o How to produce
o For whom to produce
- What to produce is answered by consumers
according their demand for goods & services
- How to produce is answered by the businessmen. They will choose the production method, which reduces their costs to reach the higher
- For whom to produce – firms produce goods
& services which consumers are willing and
able to buy.
e.g. Cuba, China, former Soviet Union
State (government) owns all means of
production. Individuals are not permitted to
own any property. Government + government
planners makes choices about What, How and
For whom to produce.
- What to produce is answered by
government planners, they make assumptions
about consumers` needs and the mix of
goods and services
- How to produce is answered by the gov.
planners according the input-output analysis.
- For whom to produce – for consumers
through state outlets. Prices can’t change
without state instructions. (Restrictions)
Role of government
1. To pass laws to protect businessmen &
2. To issue money
3. To provide certain services – police
4. To prevent firms from dominating
The market and to restrict the power
Of trade unions
5. Repair and maintain state properties
Role of government
1. Government make the most economic
decisions with those on top of the hierarchy
giving economic commands to those further
down the ladder.
2. Government plans, organizes and coordinates
the whole production process in most
3. Government is the employer of most workers
and tells them how to do their jobs.
Goods and services go where they are most in
demand and free market responds quickly to
people’s wants + wide variety of G&S
No need for and overriding authority to
determine allocation of goods&services
Producers and consumers are free to make
changes to suit their aims
Competition and the opportunity to make large
profits, greater efficiency, innovation
It mis-allocates resources(to those with more $)
It creates inequality of incomes
It is not competent in providing certain
It leads to inefficiency (market imperfection)
It can encourage the consumption of harmful
goods - drugs
There is more equal distribution of wealth
Production is for need rather than profit.
Long-term plans can be made taking into
account a range of future needs such as
population changes and the environment.
Vast bureaucracies employing – supervisors,
People are poorly motivated
Planners often get things wrong – shortages
of surpluses of some goods
Poor standard of living
There are no pure free market economies or pure command economies. Because of: Command economies are impossible to regulate all markets
Free market economies can’t provide public goods (defence) and can’t provide merit goods in sufficient quantity.
3. MIXED ECONOMY
All Western European countries
The balance between state provision (government planning) and free market provision is more or less equal. The government decides the “degree” of mixing. They will decide how much business activity there will be in the private sector and the public sector.
• In the countries, where the government plays important - major economic role the social provision will tend to be greater, taxed higher and distribution of...
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