Economic System

Economics - Economicsis thesocial sciencethat

analyzes theproduction, distribution andconsumption
ofgoods & services.
Economic Systemis the system of production,
distribution and consumption
An economic system is a mechanism (also defined as
system or social institution) which deals with the
production, distribution and consumption of goods and
services in a particular society.
The economic system is composed of people, institutions
and their relationships. It addresses the problems of
economics like the allocation of the resources.

Aneconomic systemis the combination of the various agencies, entiti

that provide the economic structure that guides the social community.

 Economic System: Anorganizedway in which a

state ornation allocates its
resourcesanddistributes goodsandservicesin
the nationalcommunity.

 Types:
Capitalism (Market Economy)
Socialism (Planned economy)
Mixed (Capitalism + Socialism)

Capitalism

 Capitalism is an economic system in which the means

of production are privately owned and operated for
profit, usually in competitive markets.
In other words; An economic system in which investment
in and ownership of the means of production,
distribution, and exchange of wealth is made and
maintained chiefly by private individuals or corporations.
OR
Capitalism is the social system which now exists in most
countries of the world. Under this system, the means for
producing and distributing goods (the land, factories,
technology, transport system etc) are owned by a small
minority of people. We refer to this group of people as
the capitalist class. The majority of people must sell their
ability to work in return for a wage or salary (who we
refer to as the working class.)

 ADAM SMITH called the

obvious and simple system
of natural liberty (Book:
Wealth of Nations).
Subject to certain restrictions,
individuals (alone or with others)
are free to decide where to invest,
what to produce or sell, and what
prices to charge. There is no
natural limit to the range of their
efforts in terms of assets, sales,
and profits; or the number of
customers, employees, and
investors; or whether they
operate in local, regional,
national, or international markets.

(Adam Smith)
Centralized to Decentralized
system

Mercantile
System

Authoritarianism to
representative democracy
Free flow of resources

Production Factors
in Government
hands

People strive for self interest in

free market

Export emphasis

Beneficial for society

Based on Demand & Supply
Forces
Monopoly to Competitiveness
Self sufficiency to International
interdependence
Producer interest to customer

 Benefits of Capitalism
In years 10001820 world
economy grew six-fold,in years
18201998 world economy grew
50-fold
Provides Choice to customers
Provides valuable goods and
services
Capitalism actively rewards
positive traits like hard work
Similarly, it punishes negative
traits such as laziness and theft
Narrows the gap between common
person and wealthy
Provides opportunity to realize
dreams and desires
Capitalist societies usually do not
have largeblack markets
Build on democracy
Social Good

 Major limitations/
Criticism:

Downfall of work ethics

Free Market + Self Interest
Accumulation of wealth
Encourages inequality in a
society
Business lobbying with
government
Monopolistic tendency
Human resource
exploitation
Results in great disparities
between income of people
owning the capital
resources and others

Socialism

Collective ownership and democratic control of the

material means of production by the workers and the
people
Socialism is a term applied to an economic system in which
property is held in common and not individually, and relationships
are governed by a political hierarchy. Common ownership doesn't
mean decisions are made collectively, however. Instead, individuals
in positions of authority make decisions in the name of the
collective group.
Socialists argue that socialism would allow for wealth to be
distributed based on how much one contributes to society, as
opposed to how much capital one holds.
A primary goal of socialism issocial equalityand adistribution
of Wealth based onones contribution to society and an economic
arrangement that would serve the interests of society as a whole.

Socialism as we know it today, most commonly refers to

"market socialism," which involves individual market
exchanges organized by collective planning.

Difference between socialism and communism is that

communists directly oppose the concept of capitalism, an
economic system in which production is controlled by private
interests. Socialists, on the other hand, believe socialism can
exist within a capitalist society.

 Features of Socialism;

Social Ownership of means of production

Existance of public sector
Decisive role of Economic Planning
Production guided by Social Benefits
Abolition of exploitation of labour

 Benefits of Socialism
i.
ii.
iii.
iv.
v.
vi.

Better salaries
Stable Environment
Eliminates poverty
Better Products
Fulfills survival need
Opportunity for citizens to explore noneconomically-productive pursuits

 Criticism of Socialism

Distorted price signals

Suppression of economic democracy
Slow Technological advancements
Minimize self management
Reduced incentives

COMPARISON

COMPARISON..

BASIS OF
DIFFERENCE

CAPITALIST ECONOMY

SOCIALIST ECONOMY

Resources
Ownership

Privately owned

State owned

Foundation belief

competition brings out the

best in people

cooperation is the best

way for people to
coexist

Earning of wealth

everyone works for his own

wealth

everyone works for

wealth which is
distributed equally to
everyone

Market Scenario

Level playing field

Protection to PSUs,
Private enterprises are
permitted in few
businesses only

Govt. interference

Only in situations where laws Fully involved

have been broken

Employees
motivation

Highly motivated on account

of proportional benefits

Rarely motivated as
performance is not
rewarded

Merit

Perception of better
economic growth because of

Equal distribution of
income results in

Mixed Economy
Any economy in which private corporate
enterprises and public sector enterprises exist
side-by-side, and decisions taken through market
mechanism are supplemented by some form of
partial planning, is to be described as a mixed
economy.
This system overcomes the disadvantages of
both the market and planned economic systems.

 Provides a clear demarcation of the boundaries of

public sector and private sector so that the core
sector and strategic sectors are invariably in the
public sector.
The government intervenes to prevent undue
concentration of economic power, and
monopolistic and restrictive trade practices
The rights of the individual are respected and
protected subject only to the requirements of
public law and order and morality

 Features
Resources are owned both by the
government as well as private individuals. i.e.
co-existence of both public sector and private
sector.
Market forces prevail but are closely
monitored by the government.
Monopoliesmay be existing butunder
close supervisionof the government.

 Advantages
Producers and consumer have sovereigntyto
choose what to produce and what to consume but
production and consumption of harmful goods and
services may be stopped by the government.
As compared to Market economy, a mixed
economymay have less income inequalitydue to
the role played by the government.
A mixed economy represents an achievable balance
between individual initiative and social goals.