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Economic Systems

Essay by   •  June 27, 2011  •  Essay  •  1,267 Words (6 Pages)  •  1,448 Views

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An economic system can be described as 'an organised way in which a state or nation allocates its resources and apportions goods or services in its national community.' (www.businessdictionary.com)

Decisions regarding a state's resources and produce and how it is controlled are based on three fundamental economic questions. These questions relate to what is produced, how much is produced and to whom it is distributed to. It is the way in which a state handles these questions which determine the type of economic system adopted.

There are four main types of economic systems, the free market economy, mixed economies, planned economies and economies in transition although variations within each exist. The market economy, also recognised as capitalism, is a decentralised system in which operations and decisions are made through market mechanisms such as supply and demand. In a true market economy, government intervention, protection and promotion are scarce.

As there are no limitations as to what is produced; the price mechanism acts as an indicator for both consumer and producer. In order to present where resources are required, prices will rise or fall relative to scarcity or surplus quantities. In the case of scarcity, prices will peak and then plummet with surplus produce.

The free market aims to maximise profits, consumer benefits, choice and wages relative to the cost of working. In theory, there is to be an expected balance between demand and supply and prices. Economists would argue that in its purest form, the free market does not exist, due to the desirability of certain outcomes. However, countries such as the US demonstrate a lean towards more capitalist principles.

It can be suggested that reasons behind the free market never truly existing is down to distinct differences in equalities, barriers affecting market entry and immobilisation of factors of production, and concern for the environmental impacts such as deforestation and carbon emissions. Reasons can also include the controlling of surplus produce to protect the wellbeing of producers. Intervention such as this can be seen within America's corn industry where produce is regulated as to ensure prices are not driven down with overproduction, in the interest of agricultural sustainability and the livelihood of farmers. (www.essortment.com/market-system-24134.html)

In contrast to a free market, opposite concepts within a command economy see centralised and state controlled decisions over both public and private sector happenings. Certain Marxist principles would argue command economies can also but not fully be linked with communism or socialism. Economic principles see all aspects of production and distribution controlled by the state decisions.

Although planned economies 'in theory' are to benefit all members of society, discrepancies have been discovered. Government control means that they become a monopolistically controlled sector, causing insufficient investment and a lack of incentive for productivity and a growth in 'black markets'. Countries such as Cuba and North Korea display a command economy still in full form; however with the fall of communism in Europe, Cuba lost support from the Soviet Union and as an impact, the economy suffered.

Problems within Cuba's economy grew further with lack of investment, causing Cuba to open its country to foreign investment (1992), although it was only limited to joint ventures. Small scale private sector businesses such as family run restaurants, shops etc. were allowed to operate by 1993, although the amount did little to boost the economy. (http://www.economywatch.com/economy-articles/command-economy.html)

In a system such as the command economy, market forces and prices play little part in the utilisation of resources. Generally this is determined by planning processes and target rates based on the government's view of the people's needs. Factors considered upon utilisation involve current consumption and future investment. Further past examples of command economies include the former Soviet Union (USSR) and the People's Republic of China before the reforms, who have now initiated more towards a free market economy, thus, categorising them as 'Economies in transition'.

Transitional economies demonstrate the liberalisation of a centralised planning system toward a free market system. As mentioned previously, with the fall of communism

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