ECONOMIC SYSTEMS

OBJECTIVES

1. Outline the advantages of economic systems2. Outline the disadvantages of economic systems

RECALL

• There are four basic types of economics systems:• Traditional• Command/planned• Free market• Mixed

TRADITIONAL

MERITS1. The basic economic questions are already answered

because there is direct production, so people provide what they want.

2. Crime is relatively low since individuals focus on survival.

3. There is very little environmental degradation. Production methods are sustainable

Slash and burn techniques are used in agriculture in some traditional economies

DEMERITS1. There are fewer choices for individuals because there is

a limited range of goods and services available.

2. Risk taking is are because failure can lead to starvation if crops fail

3. There is an inadequate use of skills relative to the resources available, because skills are predetermined.

For example the daughter of a seamstress can have the innate abilities (good recall, above average intelligence) that would enable her to b a doctor. However, because of custom, she has to be a seamstress.

COMMAND OR PLANNED

MERITS1. Government controlled prices do not fluctuate.

2. Vulnerable members of society (elderly, minorities) are cared for.

1. Basic needs of society are met.2. There is no wasteful competition (like advertising)

since the state controls production

1. There is limited choice for consumers.

2. There is little incentive for enterprise and innovation because volume targets are set. There is no reward for producing extra.

3. The environment may be degraded because in meeting volume targets planners may not factor in damage to the environment.

4. Planning may be inaccurate since it is difficult to forecast the needs of the members of the society.

FREE MARKET

MERITS1. Consumers have a wide range of choices since there

are more suppliers.

2. There is a strong incentive to innovate.

3. There is a high level of competition.

DEMERITS

1. There is inequality of income with the haves and the have-nots.

2. The wide range of choice is only available to those who can afford it.

3. Firms can influence prices by restricting output.

4. Since firms are driven by profit the level of environmental degradation tends to be high.

Pollution in China

MIXED

MERITS1. It ensures that citizens have a minimum standard of

living.

2. Since resources are allocated by both the private and public sector, it means that when the private sector fails to provide a good or service, it is provided by the state.

3. There is less environmental degradation than in the command or free market economic systems. The state will intervene to protect the environment for future generations.

DEMERITS

1. Corruption may damage relations between public and private sectors.

2. Private sector may evade taxes and regulations.