Economic Systems
There is more than one way for an economy to organize its economy. The government may decide what's best or the government might stay out of it, leaving the economic system- structure of methods and principles that a society uses to produce and distribute goods and services- to be determined by the combined decisions of millions of individual people. Economic system is defined as how a society chooses to produce, distribute, and consume goods and services. Since resources are scarce and not always available each society must determine three important factors when determining their economic system.
These factors are how the goods will be produced, who will produce these goods, and for whom these goods will be produced for. Society must use the resources they have available for the allocation of these goods. Because each society is different and does not produce, distribute, or consume the same goods and services, each society in the economic system is categorized into four different types of economies. These economies are known as traditional, market, command, or mixed economies. Traditional economy is shaped mainly by traditions, customs, and beliefs of the community.
In a market economy decisions are determined by a free market. A command economy is an economy controlled by the government who regulates the supply and prices of the goods and services produced. The mixed economy is where both the private sector and the government make the decisions on what goods and services are produced, how they will be produced, and who will produce them. One type of the economic system is the traditional economy. In a traditional economy goods and services are developed based on the traditions, customs, and beliefs of the society.
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This type of economy is an underdeveloped economy because of the use f primitive tools and methods the society uses to produce these goods and services. Most traditional economies use hunting and fishing to sustain their community and produce very little surplus of goods. If any society does have a surplus of goods these are often given to the landowner or a person of higher authority. This resulting is minimal economic growth. Traditional economies are found in rural regions and are industrialized. Most of these regions are located in the third world regions of Africa, Asia, Latin America, and the Middle East.
Traditional economies answer the questions of what goods and services are reduced, how these goods and services will be produced, and who will consume these goods and services by the traditions, customs, and beliefs of the community. Traditions are usually formed and remain unchanged, therefore offering little opportunity for growth. Goods and services produced in this type of economy are usually hunting, fishing, and ones that can be produced using the land available (Madame). In this society every person has a specific Job to do for the production of these goods and services.
The amount they produce is only enough to keep their society alive. They do not produce for growth or wealth. Money is not needed in this economy because these societies use barter and trade for the distribution of their Economic Systems By scuppers There are two levels of traditional economies, basic and next. In the basic level the society is nomadic and lives in families or tribes. Most cover a large area and usually follow the animals to find food. They move to follow the weather. In the next level , the society will find land and become farmers where they are able to plant and grow food to sustain them.
They are able to support more people in the society and build moms to live in. Here they can trade and barter good and services instead of competing for them. A true traditional economy does not exist in today's society, although there are many in third world countries that could be considered traditional economies. This is because most live in poverty with no means of escaping it. War and disease often destroy these societies. They are most vulnerable to the weather and have little means of protecting themselves from others.
Examples of a traditional economy would be the Intuit tribes in northern Canada and the Same reindeer hunters in Scandinavia. Both of these societies use hunting and bartering to sustain their needs. They only hunt and produce what is necessary for their survival. A market economy is another type of the economic system. In this economy, the decisions of what goods and services are produced, how these goods and services are produced, and who will consume these goods and services are determined by the free market. This basically means that both supply and demand determine the production of goods and services.
It also mandates the price set for the goods and service and who will consume these goods and services. Producers can sell their goods and services at the highest price the consumer is willing and able to spend for those goods and services. Workers are also able to bid their services and wages to the highest bidder based on their skill level and education. There are six characteristics of a market economy. They are private property, freedom of choice, motive of self-interest, competition, system of markets and prices, and limited government.
The characteristic of private property entitles owners to rent, sale, lease, and transfer their goods and services through legally binding agreements. Since most goods and services are owned this gives the property owner the right to benefit from the sale and use of this property. The only thing you can not sale or purchase is yourself and other people or any body parts. Freedom of choice says any worker, business, consumer, and owner can produce, sell, or purchase good and services in the free market. This is determined by the amount they are willing to pay for those goods and services and the amount of money or capital they have available.
Motive of self- interest another characteristic. Here producers try to sell their goods and services to he highest bidder while the consumer attempts to buy those goods and services at the lowest possible price. Another characteristic is competition. Competition keeps prices level. As the supply for goods and services increase the demand for that item decreases, but as demand for the item increases the supply for those goods and consumer and producer the best product available at the best price. The system of market and prices is a characteristic in which prices increase and decrease based only on the law of supply and demand.
The last characteristic of a market economy is limited government. Here the government's involvement is to ensure the markets are open and operating. It also uses it's ability to defend so no other nation or country can destroy the market. There are several advantages of a free market economy. One advantage is competition. Competition allows producers/sellers to compete among each other to sell their products for the best price. Many employees of businesses would have an incentive to work harder if their Jobs were on the line.
Another advantage would be that sellers can decide what they want to sell and where they want to send it, unlike the command economy. Another would be foreign investment. Foreign investment is attracted to people from other countries when they hear of Job opportunities here in the United States. The factors of production would undergo drastic changes. "Many people quickly acquire the technical and social skills and knowledge needed to function in this new economy' (Oilman). There are also disadvantages of a free market economy. In a market economy, there is often an overabundance of goods being produced, especially when a new fad comes about.
Often, "there is growing inequality from the social and economical inequality (the rich get richer and everyone else gets poorer, many absolutely and the rest in relation to the rapidly growing wealth of the rich)" (Oilman). A command economy, also known as a centrally planned economy, is another type of economic system. Command economies operate in complete difference to market economies. Command economies oppose free market pricing, competition, consumer choice, etc. In command economies, the government controls all decisions that have to be made. A central bureaucracy decides what items to produce, how to produce them, and who gets them" (Sullivan). The government tells producers what they can and cannot produce, how gets the products, and how many products will be made. Terms that are often linked to central planning are socialism and communism. Though often used interchangeably, the terms actually describe completely different systems. Socialism is not a single economic system, but a range of economic and political systems based on the belief that wealth should be evenly distributed throughout society (Oilman).
Communism, on the other hand, the central government owns and controls all resources and means of production and makes all economic sections (Oilman). Karl Marx, the 19th century father of communism, was outraged by the growing gap between rich and poor. "He saw capitalism as an outmoded economic system that exploited workers, which would eventually rise against the rich because the poor were so unfairly treated. Marx thought that the economic system of communism and all property should be publicly owned and that people should be paid on their abilities and needs. Socialism in a sense is Just alike communism.
They both believe that wealth should be shared more equally among the people and that the common people, people in mineral, should be make the major choices of the government (casuistry. Org). Socialists argue that workers should not be overthrown, like communists say. Socialism is a social state between the overthrow of capitalism and the realization of communism. There are several disadvantages of a command economy, such as: economic efficiency, economic freedom, economic growth, and economic equity. Command economies don't have economic efficiency since the government owns all production factors and controls the wages.
If workers are paid low, then they don't have the incentive the work faster or improve their working abilities. Economic freedom is also not available in a sense that command economies often have to sacrifice individual freedoms to pursue social goals. Command economies discourage change, so there is no way that they will be able to receive economic growth. "A major goal of communism is to increase economic equity by distributing goods and services fairly. Such equity has been proven very rare" (casuistry. Org). Often the ordinary people are suffering and the upper class people are receiving the wider variety of goods.
The disadvantages of command economies have forced leaders in many countries to move themselves from command economies over to mixed economies (Sullivan). The last economic system is a mixed economy. A mixed economy is a combination of market, command and traditional economies. In mixed economies the government is involved to some extent. "A mixed economy seeks to have all the advantages of a market, command and traditional economy with little of the disadvantages" (Madame- Mixed). "Most mixed economies have three of the six characteristics of the market economy: private property, pricing and individual self-interest"(Madame-Mixed).
Private property is property that is owned by individuals or companies, not by the government or the people as a whole. "The Fifth and Fourteenth amendments to the Constitution protect private property by declaring that no person may be deprived of "life, liberty, or property, without due process of law. " "(Sullivan). Pricing is determined by the supply and demand of goods and services. Prices, in turn, tell businesses what to produce; if people want more of a particular good than the economy is producing, the price of the good rises.
That catches the attention of new r other companies that, are sensing an opportunity to earn profits, start producing more of that good. On the other hand, if people want less of the good, prices fall and less competitive producers either go out of business or start producing different goods. Finally, self-interest is the motivating force in the free market-- the push that leads people to act on. Mixed economies also have a command economy in certain areas. Most allow includes the military, international trade, and national transportation (Madame- Mixed). An increased governmental role depends on the priorities of the people.
Some mixed economies encourage the government to centrally manage health care, welfare, and retirement programs. Governments nearly ban all imports from other countries, and "production of foreign goods and services are forbidden" (Sullivan). A mixed economy can enjoy the advantages of a market economy. "First, they can efficiently allocate goods and services where they are needed, by allowing prices to measure supply and demand" (Khan). Secondly, they can enjoy a high level of economic freedom. Foreign investment is also encouraged, unlike that in command economies.
Thirdly, private property is protected by the government, and only interfere with establishing wages and price control on rent. "Fourth, it automatically allocates capital to the most innovative and efficient producers" (Khan). There are many ways for an economy to organize its economy. Economic system is defined as how a society chooses to produce, distribute, and consume goods and services. Since resources are scarce, economies must ask three important questions to determine how resources are to be distributed. Those three questions would be: What goods and services should be produced?
How should these goods and services be produced? And Who consumes theses goods and services?. Because each society is different and does not produce, distribute, or consume the same goods and services, each society in the economic system is categorized into four different types of economies. These economies are known as traditional, market, command, or mixed economies. All these economies have their similarities and differences, but they have helped shape our country and world as a whole. The most common economy would be a mixed economy and its a combination of traditional, command, and free market economy.
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Economic Systems. (2018, Jul 23). Retrieved from https://phdessay.com/economic-systems-9/
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