Business & Legal Environment

By Prof. (Dr.) Vijay Kr Khurana

What is Economic System?

An economic system or economy is a system designed by a nation to utilize her resources for the purpose of satisfying the needs & wants of the people W W Loucks An economic system consists of those institutions, organizations and policy mechanisms, which a nation has chosen, through which its resources are utilized for satisfaction of human wants

Why Economic Systems?

Players: Goal Consumers: maximize personal utility Businesses: maximize long-run profit Government: maximize social welfare Goals of different players in an economy differ. This may result in improper allocation of resources and national priorities may be ignored

Why Economic Systems?

Nations use economic systems to determine how to use their limited resources effectively. Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life.

What are Characteristics of Economic Systems? National / macro in character

Institutional Framework variety of firms, organizations, households i.e. institutions make it Interdependence - different components / institutions do not work in isolation, but they are interdependent Scarcity of resources is the central problem most of the times Need satisfaction maximum welfare is the end Dynamic keeps on changing Complex difficult to monitor, diagnose & effect changes Influenced by location specific & geographical factors It may vary from one nation to another from small to large degrees

 Households Firm Industry is a group of firms tending to specialize in same transactions or series of transactions Government

What are basic units of Economic Systems?

What are functions of Economic Systems?

1. How much should the economy produce? It depends on the resources it has available

2. What should be produced? Viz. USA economy is service & manufacturing dominated Bangladesh economy is agriculture & manufacturing dominated

What are functions of Economic Systems?

3. How are the goods and services produced? By the most efficient companies. Sometimes by the government. 4. Helps in planning for current needs & future needs 5. Facilities economic growth, increased productivity & improved standard of living

What are various types of Economic Systems?

Broadly Speaking 3 types: 1. Capitalism / Free market Economy 2. Socialism 3. Mixed Economy

Capitalism
Capitalism is a economic system in which private individuals own all materials means of production and all economic activities are undertaken for the purpose of profit It is an economic system where private businesses and consumers decide what they will produce and purchase and in what quantities. Decisions are made according to law of supply & demand It was advocated by Adam Smith 1776 The Wealth of Nations It Maximizes liberty Laissez-Faire Anyone can go in any direction; Govt generally does not interfere in the economy Freedom to succeed and freedom to fail

Characteristics of Capitalism
Right to Private Property Right to Inheritance Private ownership of capital (means of production) Freedom of Enterprise everyone is free to pursue any economic activity Freedom of choice for Consumers Profit is the motivator Price Mechanism Market forces of demand & supply determines the price Competition is the regulator (not government) Government does not interfere Under pure capitalism, almost all goods would be provided by the private sector (small government) police, courts, military (even schools and the fire department could be private goods) Good of the individual is above society Do not tax the rich more than the poor no redistribution of income

Merits & Demerits of Capitalism

Advantages

Incentive for growth Efficient utilization of resources Rapid Economic Growth Encourages capital formation Flexibility & Adaptability to changing situations Democratic in nature Encourages innovation

Disadvantages
Concentration of economic power Economic instability Lack / gap of max social satisfaction at min social costs Social waste Rise of Monopoly Social discrimination Loss of human values

What is Socialism / Communism / Controlled Economy ?

Socialism is an economic organization of a society in which all material means of production are owned by the whole community and operated by organs representative of and responsible for the whole community according to a general economic plan and all members of community are entitled to benefit from the results of such socialized production on the basis of equal right It is an economic system where the government (or central authority) determines what, how, and for whom goods and services are produced.

 It Maximizes Equality It was advocated by Karl Marx 1848 - The Communist Manifesto Industrial Revolution Europe horrible working conditions - critique of capitalism 1. View of History class struggle (bourgeoisie and proletariat) 2. Labor Theory of Value all value comes from labor 3. Nature of the State the state (government) always sides with the rich 4. Dictatorship of the Proletariat poor must overthrow the government and set up a classless society

What is Socialism / Communism / Controlled Economy ?

Characteristics of Socialism
State / Government (Public) ownership of the means of production Central Economic Planning Focus on social welfare Good of society is above the individual Equality of Opportunity to one & all For each according to his ability, to each according to his need. Lots of government intervention in the economy to promote equality Classless society Absence of competition Workers run the factories everyone earns an equal amount

Advantages --

Advantages & Disadvantages of Socialism

Social justice Economic stability Rational Allocation of resources Higher Economic Growth Absence of Class Struggle Guarantees equal standard of living for everyone Less crime and poverty Needs are provided for & through the government Disadvantages - Concentration of Economic Power in the hands of State Lack of incentive and initiative - No incentive to produce better product or engage in entrepreneurship Loss of Consumer sovereignty - Minimal choices; Fewer choices of items Loss of occupational freedom Inefficiency & low productivity Corruption

What is Mixed Economy ?

It is an economic system which combines features of both Capitalism & Socialism. Both Private Sector & Public Sector exist side by side Both Government & Marketplace takes care of peoples wants. Most nations have a mixed economy to varying degrees: India , United States, England, Australia

Co-existence of Public & Private Sectors Classification of Industries Reserved , Open Economic Planning at Centre sets the direction Price Mechanism Partially free & Partially administered / regulated Profit motive cum social welfare motive

Characteristics of Mixed Economy

Merits

Advantages & Disadvantages of Mixed Economy

Some needs and wants met in marketplace; and balance of needs and wants met by government Good Individual freedom Rapid economic growth Social welfare Economic instability Lack of full freedom Inefficiency Lack of coordination Citizens have to pay taxes

Demerits

An Old System Traditional Economy

Found in rural, under-developed countries Vanuatu Pygmies of Congo Eskimos tribes Customs govern the economic decisions that are made Farming, hunting and gathering are done the same way as the generation before Economic activities are centered around the family or ethnic unit Men and women are given different economic roles and tasks Advantages: people have specific roles; security in the way things are done Disadvantages: Technology is not used; difficult to improve