WEEK 2: ECONOMIC SYSTEMS &

PROBLEMS
Way of organizing the relationship among
individuals, firms & government agencies
How to make choices
To answer basic economic questions (i.e.
what/how/for whom to produce
Economic
Systems

Characteristics

Social Economy

Government/Central
Authority make economic
decisions
Individuals/Sellers make
economic decisions using a price
system

Capitalism
Economy (Free
market
economy)
Mixed Economy
Islamic
Economy

Combine both Social &

Capitalism Economy
Economic decisions are made for
public and private sectors
according to Islamic
principles

CAPITALISM (FREE MARKET)

Private ownership of resources

Rights to own resources

No restriction to own private properties

Freedom of enterprise & choice

Free to own resources and establish

any enterprise of their choice
Consumers sovereignty

Consumers preferences will affect

production of goods & services (GS)

Producers have to produce GS to meet

consumers preferences
Competition (aim to have highest profit)

Aim to obtain highest profit

Product of high quality with greater

efficiency
Government intervention (to stabilize the
economy)

Limited government intervention

To stabilize the economic conditions of

the country
Price mechanism

System used to make economic

decisions

Free operation of demand & supply

forces without intervention

SOCIALISM
Public ownership of resources

Resources are owned/operated by the

Gov/state

Ensure equal opportunity of all citizens

To fully utilize the country resources

Central Planning Authority

Responsible for making economic

decisions for society

Plans & allocates resources for current

consumptions & future investment
Central control & ownership

Fully planned economy by Gov

Gov controls economic activities,

productions, consumptions &
distribution of GS
Price mechanism

Less important to market forces

Prices are fixed by the Gov & not

determined by demand & supply

Private profits are not allowed

Public interest is emphasized

MIXED ECONOMY
Public & private ownership of resources

Private enterprises conduct business

freely

Gov encourages by providing facilities

& infrastructure
Price mechanism & Economic plans

Price mechanism: system used to make

economic decisions

Commodities: Declared as controlled

items & Gov fixed the price
Gov helps to control income disparity

Through income taxes & welfare

payment

Gov has direct control over profits,

wages & rent: Helps to narrow the
income gap between rich & poor
Co-operation between Gov, public & business
sectors

Leading to economic development

Gov intervention in the economy

Particular industries

For public welfare

i.e. low cost
houses
Gov controls monopolies

Monopolists: Single player in economy

Gambling

Uncertainties
Freedom of economy enterprise

Man has freedom & encouraged to

choose any enterprise

Need to meet consumers economic

activities

Gov will regulate the power of

monopolists

ISLAMIC
ECONOMY
Public & private
ownership by God

Resources
are owned
by God

Human
beings are
the trustees
to

Economy
Systems

What to
produce

How to produce

Capitalism

Only based
on
demands
by the
consumers
to enjoy
high profits

Socialism

-Decisions
by planning
authorities

Variety of
To the
Capitalism
methods
consumers
depends on the
who are
Merits
price
of
affordable
resources
to buy it
Production according
Inequality of
(price
to needs of
distribution of wealth
mechanis
consumers
& income
m)
Economic freedom
Inflation & high
-Choice
between
Efficient
utilizationDistributio
of
traditional/mode
ns of unemployment rate
resources
rnGreater variety of various
Lack of social welfare
consumer goods commoditi
-Decide
by trade,
es among
Enhance
Unnecessary variety &
authorities
citizens
business & research
wasteful competition
& dev (R&D)
Flexibility
Misallocation
of
-Public & private
Decided
by
sectors will
publicresources
&
decide on the
private
techniques of
sectorSocial costs
production
Gov
interventio
n through
taxes &
subsidies

-Based
nation
needs
Mixed

- Decided
by both
public &
private
-Depends
on
considerati
on of social
welfare &
economic
growth

manage/enjoy but not as absolute

owners of the resources
Price mechanism & limited Gov intervention

Price fixing by buyers & sellers are

prohibited

Market is determined by demand &

supply forces
Distribution of wealth

Based on need of the consumers

Not wealth creation (capitalism &

socialism)
Prohibition elements

Interest

For whom
to produce

Merits &
Demerits

ECONOMIC DECISIONS