Economics
Economic Systems
Theme 1
All societies are faced with the problem of scarcity – limitations of elements needed to
produce products or provide services. They differ considerably in the way they tackle the
problem – three different options are possible:
One important difference between societies is in the degree of government control of the
economy. At one extreme lies the planned or command economy, where all economic
decisions are taken by the government. At the other extreme lies the completely free
market economy. In this type of economy there is no government intervention at all.
Market economy: resources allocated through the price mechanism, with market
prices being determined by the forces of demand and supply.
Planned economy: the government makes the decisions about what is produced,
how resources are allocated and how the finished products are distributed.
Mixed economy: contains features of both the market and planned economic
systems, with the government intervening in various ways to influence market prices
and resource allocation.
All ‘real’ economies are mixed.
Market economy: advantages
Resources allocated automatically via ‘money votes’.
Consumers are therefore ‘sovereign’ in deciding what is to be produced.
Producers, motivated by profit, will have incentives to respond to changes in the
preference of consumers.
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, Market economy: disadvantages
Those with the highest incomes have most ‘money votes’, causing economic
disparity.
Competition may be imperfect, so firms may gain ‘market power’ (e.g. monopoly)
and so limit consumer choice.
Externalities: some costs or benefits to society may not be reflected in the market
system as costs or benefits to private firms or individuals.
Planned economy: advantages
Careful planning can avoid duplication and the waste of scarce resources.
Planned economies are often claimed to have less income inequalities since the state
owns and controls factors of production.
Excess demand need not result in price rises since prices of product are controlled by
the state.
Planned economy: disadvantages
Planning authorities may misjudge consumer preferences.
Absence of profit and other incentives may reduce incentives to work harder and to
take risks.
State control of production may mean less competition and therefore more
inefficiencies.
State bureaucracy grows to plan and control production.
Mixed economies
Combines aspects of both free market and command economies.
Markets are important, with prices acting as ‘signals’ to both producers and
consumers.
However, ‘market failure’ is also recognised, with the government intervening in
various ways to ‘correct’ such market failures.
Neoliberalism
Neoliberalism – aims to transfer the control of economic factors from the public to private
sector (laissez-faire economics). Emphasis on free market capitalism with limits on
government regulation, government spending and public ownership. Neoliberalism has
been associated with policies of austerity, and major cuts on public spending.
What do you think are some of the main criticism aimed at neoliberal capitalism?
2
Economic Systems
Theme 1
All societies are faced with the problem of scarcity – limitations of elements needed to
produce products or provide services. They differ considerably in the way they tackle the
problem – three different options are possible:
One important difference between societies is in the degree of government control of the
economy. At one extreme lies the planned or command economy, where all economic
decisions are taken by the government. At the other extreme lies the completely free
market economy. In this type of economy there is no government intervention at all.
Market economy: resources allocated through the price mechanism, with market
prices being determined by the forces of demand and supply.
Planned economy: the government makes the decisions about what is produced,
how resources are allocated and how the finished products are distributed.
Mixed economy: contains features of both the market and planned economic
systems, with the government intervening in various ways to influence market prices
and resource allocation.
All ‘real’ economies are mixed.
Market economy: advantages
Resources allocated automatically via ‘money votes’.
Consumers are therefore ‘sovereign’ in deciding what is to be produced.
Producers, motivated by profit, will have incentives to respond to changes in the
preference of consumers.
1
, Market economy: disadvantages
Those with the highest incomes have most ‘money votes’, causing economic
disparity.
Competition may be imperfect, so firms may gain ‘market power’ (e.g. monopoly)
and so limit consumer choice.
Externalities: some costs or benefits to society may not be reflected in the market
system as costs or benefits to private firms or individuals.
Planned economy: advantages
Careful planning can avoid duplication and the waste of scarce resources.
Planned economies are often claimed to have less income inequalities since the state
owns and controls factors of production.
Excess demand need not result in price rises since prices of product are controlled by
the state.
Planned economy: disadvantages
Planning authorities may misjudge consumer preferences.
Absence of profit and other incentives may reduce incentives to work harder and to
take risks.
State control of production may mean less competition and therefore more
inefficiencies.
State bureaucracy grows to plan and control production.
Mixed economies
Combines aspects of both free market and command economies.
Markets are important, with prices acting as ‘signals’ to both producers and
consumers.
However, ‘market failure’ is also recognised, with the government intervening in
various ways to ‘correct’ such market failures.
Neoliberalism
Neoliberalism – aims to transfer the control of economic factors from the public to private
sector (laissez-faire economics). Emphasis on free market capitalism with limits on
government regulation, government spending and public ownership. Neoliberalism has
been associated with policies of austerity, and major cuts on public spending.
What do you think are some of the main criticism aimed at neoliberal capitalism?
2
