Human get resources from the nature and world.

Therefore, resources are divided into

limited resources and unlimited resources. Societys resources have to manage properly
because resources are scarce. Human has the insatiable wants and resources are limited at the
same time, so human are facing scarcity which means the society has limited resources so
that cannot provide all the goods and services upon to human require. According to Thomas
Sowell,
The first lesson of economics is scarcity: There is never enough of anything to satisfy all
those who want it. The first lesson of politics is to disregard the first lesson of economics.
(Thomas Sowell1930)
Hence, economics is to study how the society manages its limited and insufficient resources.
Due to the fundamental economic problems, people have to make decisions or choiceson
their requirements.
Every society sets up some ways to solve the fundamental economic problem that
called as economic system. Economic system refers to the decisions made by the society.
Economy system performs traditional functions and non-traditional functions. The traditional
functions of economy system include in deciding what to produce and what not to produce.
For example, country want to provide roads and entertainment services, it may face problems
due to the lack resources at the same time. Country has to make choices between the two.
People face trade-off when making decisions and cause the opportunity cost which mean
whatever have to give up to obtain some item. An economic system can consider producing
the more benefit goods and services. Economy system also uses to decide what technique to
be used in production. The economic system decides the best combination elements to be
used in order to maximize the use of the scare resources by minimize the cost and increase
the productivity. Besides that, economic system decides the commodity to produce in an area

where the demanded and the costs will be minimized in the problem of whom to produce.The
non-traditional functions of economic system are to ensure economic growth and ensure full
employment in the society. Economy system has to ensure that resources are not idle or due
to the resources are scarce. Full employment is achieved by stimulating demand in the market
economy. (Economy System, 2011)
A centrally planned economy is an economy where the government make decisions on
how to produce, what to produce, and for whom. These economies are also known as
command economies. Centrally planned economies are usually occurring in communist or
authoritarian states, the theory is that the market failure will be overcome by the government
and the equality of distribution can be achieved. This type of planning can make sure that
everyone's needs are fulfilled and everything needed is produced. In the 1980s, almost one
third of the population of the world lived in centrally planned economic system, mainly in the
North Korea and Soviet Union. (SparkNotes: Political Economy: Types of Economies. 2014)
In centrally planned economy system, some or all of firms producing goods will own
by the governments. The government institution, who decided to produce goods efficiently,
will determine the pricing and the production. Sometimes, the consumers rations will be
given directly or the prices of goods will be set by the government agencies. In a centrally
planned economic system, macroeconomic objectives for example unemployment and the
decisions of production will have override by the government.
"Every government interference in the economy consists of giving an unearned benefit,
extorted by force, to some men at the expense of others. " Ayn Rand.(Quotes About
Economy (205 quotes). 2014)
Some countries that are under centrally planned economic system may not just consist of
privately owned company who are nearly directed by state management, but also some state

owned property. People in the country will get their goods and supplies by the allocation of
government under the ratio of work, needs but not the capital. (Command Economy |
Economics Help. 2014).
Centrally planned economies have several advantages. First of all, both surplus
production and unemployment rates remain at a reasonable level in a centrally planned
economic system. The needs of people will never go unfulfilled and can be produced enough
for all because the government knows how much of the goods are needed. Therefore, market
failure can be prevented. Centrally planned economies goods which benefit the society could
be produced and the acquirement of basic necessities of the people can be ensured with the
centrally planned economies. (Differences Between Centrally Planned and Market
Economies - Basic Economic Questions. 2014). However, there is no price system in this
system. Arbitrary decisions will not be able to make the best use of resources and become
inefficiently. In this system, incentives tend to be distorted. Workers with guaranteed
employment and managers who gain no share of profits are difficult to motivate. Output and
quality will suffer. The dominance of government may also lead to a loss of personal liberty
and freedom of choice. For example, many people had suffered in the North Korea Famine
from 1994 to 1998. They have no choice to eat the human themselves because of hunger. This
case has showed the collapse of the centrally planned economies. (Asia Times: North Korea's
Kim-made famine. 2014). In 2003 there were some reports of the fears of widespread
starvation and serious food shortages in North Korea (centrally planned economy, 2010).
The market based economies is based on the division of work in which production is
in private hands and wages and prices determined by demand and supply in the economy.
This economic system is just opposite to the concept of centrally planned economic system.
These economies are also known as capitalist economic system or free economic system.
Individuals are free to make independent decisions about what products they would like to

purchase at a given prices and producers then make decisions about whether they are
prepared to provide those products. Market based economies are usually occur in democratic
states such as the United States. People can change along with the changing market status to
get the best benefits in this economy system. (SparkNotes: Political Economy: Types of
Economies, 2014.)
In market based economic system, all the resources are privately owned by people and
firms and can be legally protected. Government did not disturb in the business activities. The
government only involved in the development and performance of legal system to maintain
the social order and to defend the country's security. This kind of private ownership will
encourage people to participate more in the economic production. The private interests that
people pursue are the best profit of a society.
By pursuing his own interest he frequently promotes that of the society more effectually than
when he really intends to promote it. I have never known much good done by those who
affected to trade for the public good.Adam Smith, The Wealth of Nations (Quotes About
Economy (205 quotes), 2014).
Economists assume that everyone is rational to pursue the objectives of the greatest personal
interests. When everyone has achieved the maximum benefits, social benefits will be
maximized. Thus, all the economic behaviour is based on the self-interest.
In this economic system, people have the freedom of employment, entrepreneurship
and consumption. Prices are decided by the price mechanism in the market based economic
system. Adam Smith, the Founding Fathers of economics described the invisible hand of the
price mechanism in which the hidden-hand of the market operating in a competitive market
through the pursuit of self-interest allocated resources in societys best interest. For example,
the types of goods, the quantity of goods, allocation of resources and consumer choice are

determined by the price (Market economic system - features, advantages and disadvantages.
2014).
However, the freedom of consumption may leads to the disparity of wealth and poor,
the rich people begin to think of themselves to be a better kind of human while the poor feel a
mixture of envy. People will be facing the unemployment problem because machines and raw
materials are available. The inequality of social and economic will be occur and also other
social economic issues. Besides that, the consumption of harmful goods maybe encouraged in
the market based economies. The bankruptcy of Lehman Brothers and the sale of Merrill
Lynch to Bank of America on September 15, 2008 have showed the failure of market based
economies ( Lehman Files for Bankruptcy; Merrill Is Sold - NYTimes.com. , 2008).
In 21st century, there are very few countries that rely on centrally planned economy
system. The Soviet Union has made the transition to a mixed economy. (Socialism Today The Soviet Union's place in history. 2014).This involved a process of privatization and price
deregulation. China has also made the transition from a command economy to a mixed
economy though politically the country still remains communist. (China - The Economy.
2014). Realistically, these systems tend to suffer from large inefficiencies and are overall not
as successful as other types of economic systems.
There are some issues have to solve in the changing of centrally planned economy
system to a market economy system. The price controls on necessities such as food, housing,
transportation and utilities will be removed. The control of state-run enterprise will transfer to
the private enterprise. Besides that, there will have changes in the legal system defining and
enforcing property rights. It will occurred the problems of unemployment and
underemployment (Centrally planned economy, 2010).

Many countries had abandoned the centrally planned economy system and develop to
the market economy system. China is an example after the other largest country of Russia,
Canada and USA which changes the economy system to market economy system. In year
1978, the Communist state of China experienced a transformation from a planned economy to
a market economy when Deng Xiaoping came in. China seen to increase their GDP in that
year but there still remains some questions about whether China able to get rid of its previous
image of excessive state controls and move to market economy efficiency. Nowadays, China
becomes an investors destination since there are more foreign investors come to China to
invest and start a business based on the stability of the economic. The effect of the market
economy in China still restricted to consumer goods. The prices are remaining in the preview
of a planned economy system. Moreover, the labour market not yet regulated and wage rates
are not totally determined by market. China needs to adopt the policy of market economy
heart and soul as a Chinese government official said that. The failure feature of Chinese
economy can present in rural areas of surplus labour. Agriculture employs about 45% of the
population while it only has 12% for the GDP shares. Government failed to sustain the rural
poor and the Chinese populations still lied below the poverty line (EconomyWatch, 2010).
The development of economy in the society will bring a lot of effects for the world. It will
have environmental problems especially air pollution which will be harmful for our
environment. Efforts should be taken by the country to solve the problems such as air
pollution and soil erosion. 'Market economy can exist within Socialism too, the socialistic
ethos should be upheld such that every individual gets his due share in this era of one sided
economic prosperity.'The Chinese prime minister Wen Jiabao said that(EconomyWatch,
2010)
Transformation of the economic system may bring some negative effects which are
fall in GDP, unemployment and rise in inflation. In the market economy system, suppliers

and buyers are no longer guaranteed and lead to decrease in productivity. The market is not
flexible because state companies are not used in the market. Workers were inefficient because
they often no work to do even they had jobs. The decreasing in productivity causes the lay-off
workers. In market economy, resources are handled according to the price.By transition, the
prices rise until supply equals to demand. Higher prices require higher wages and higher
consumption so caused the inflation problems (Transition from Centrally Planned Economy
to Market Economy, economic reforms, 2014).
In the conclusion, there are effects in the both economy system. Nowadays, some
countries are trying to develop in mixed economy system where are the mixed of centrally
planned and market economy system. But the most important are the policy of the
government used and the actions of the enterprise taking. The government and the enterprise
should coordinate together to ensure the country economic growth efficiency and the greater
of the productivity. The people will have a better life if the economy is growth with efficient.

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