Chapter 2: Economic Systems
This Chapter is all about different economic systems and
how they operate in terms of policies outcomes and
successes where applicable the fundamental question for
any Economic system is asked and discussed.
What is Economics?
Economics is a human science and our decisions and who
we interact with determine the outcome and flow of goods
and services, or money in the economy.
Economic systems
What is Economic system?
Ownership of factors of production
Method used to motivate, coordinate, and direct economic
activity
There are two polar extremes:
Market system (Capitalism)
Command system (Socialism or communism)
How do we define Economic Systems?
It has to do a lot with who decides on what how and for whom and
who are the owners of this. The basic difference between the two
extremes is that the one (Free market systems) promote fully private
ownership of all form of factors of production (Labour, Land, Capital,
Entrepreneurship, Technology) – compared to Command Systems
where all ownership factors of production are owned centrally by the
Government, and they decide on What how and for Whom to
produce.
, The command system
Characteristics of the command system
Government owns most property resources
Central economic plan
Central planning board makes decisions
Everything is centralised and controlled
The following information will explain why this type of system failed over
time.
Demise of the command systems
• USSR, Yugoslavia, East Germany
• Two insurmountable problems
– The coordination problem
Central planners had to coordinate millions of individual decisions
by consumers, resource suppliers and businesses.
Expansion of economies
Lack of reliable of success indicator
Difficult to assign quantitative production targets without
unintentionally producing distortions in output - The Incentive
Problem
The problems focus on the issues with: Coordination
all the decisions and activities – The System is just
too big to coordinate all activities successfully. Lack
of incentives. There are no incentives for participants
in the economy to do better. Individuals do not make
their own decisions and therefor have no incentive to
do better work harder or smarter to earn more or
move up the ladder.
This Chapter is all about different economic systems and
how they operate in terms of policies outcomes and
successes where applicable the fundamental question for
any Economic system is asked and discussed.
What is Economics?
Economics is a human science and our decisions and who
we interact with determine the outcome and flow of goods
and services, or money in the economy.
Economic systems
What is Economic system?
Ownership of factors of production
Method used to motivate, coordinate, and direct economic
activity
There are two polar extremes:
Market system (Capitalism)
Command system (Socialism or communism)
How do we define Economic Systems?
It has to do a lot with who decides on what how and for whom and
who are the owners of this. The basic difference between the two
extremes is that the one (Free market systems) promote fully private
ownership of all form of factors of production (Labour, Land, Capital,
Entrepreneurship, Technology) – compared to Command Systems
where all ownership factors of production are owned centrally by the
Government, and they decide on What how and for Whom to
produce.
, The command system
Characteristics of the command system
Government owns most property resources
Central economic plan
Central planning board makes decisions
Everything is centralised and controlled
The following information will explain why this type of system failed over
time.
Demise of the command systems
• USSR, Yugoslavia, East Germany
• Two insurmountable problems
– The coordination problem
Central planners had to coordinate millions of individual decisions
by consumers, resource suppliers and businesses.
Expansion of economies
Lack of reliable of success indicator
Difficult to assign quantitative production targets without
unintentionally producing distortions in output - The Incentive
Problem
The problems focus on the issues with: Coordination
all the decisions and activities – The System is just
too big to coordinate all activities successfully. Lack
of incentives. There are no incentives for participants
in the economy to do better. Individuals do not make
their own decisions and therefor have no incentive to
do better work harder or smarter to earn more or
move up the ladder.
