Economic systems

an economic system

is the way in which a country's resources are allocated to deal with the economic problem.  the system has to answer the following questions: what and how much to produce? how to produce? for whom to produce?

types of economic systems

market, planned, mixed

market economy

• resources are privately owned.

• decisions are made by individuals and businesses based on self-interest.

• the price mechanism determines production and distribution and answers the questions of the economic system.

• examples: Australia, USA (capitalist economies).

• increased efficiency because resources are allocated based on supply and demand, wide variety of goods and services because competition among businesses encourage them to meet consumer demand and appeal to their preferences (lower price, better quality, unique features).

• in a market economy, people earn based on their skills, resources, or capital, which can create income inequality between the rich and poor. instability and fluctuations in market economy, monopiles can take over.

planned

• Resources are collectively owned by the government.

• A central authority decides what, how, and for whom to produce.

• Production and distribution are controlled for social benefit.

• more equal distribution of resources and reduce income inequality, everyone gets essential resources like education, infrastructure. Centralized decision-making can lead to slow, cumbersome processes and a lack of responsiveness to changing needs, without the price mechanism to guide decisions, resources may be misallocated, leading to inefficiency and waste.

• Example: Former Soviet Union. The collapse of central planning in Eastern Europe and Russia shows the power and success of market forces and the difficulties in centralized coordination of the entire economy.

mixed

• Combination of market and planned systems.

• Most economies today are mixed.

• Private markets allocate most resources efficiently, but the government provides essential services (e.g., healthcare, education, law enforcement).

• Encourages innovation and efficiency while ensuring protection for vulnerable populations, private markets + government interventions/ regulations adapt to flexibility. over dependence on government/ over regulation can reduce market efficiency.

decision making in different economies

• Pure Market Economy: Supply and demand determine everything.

• Planned Economy: Government plans and controls production and distribution.

• Mixed Economy: Uses both market forces and government intervention.

competitive markets

• Many buyers and sellers.

• Little price variation (firms are price takers).

• No product differentiation.

• No barriers to entry or exit.

• Firms have no market power- there is a competitive market with many sellers so if they raise prices, buyers will go elsewhere. they must accept the market price and cannot influence it.

  e.g. a wheat farmer selling crops must sell at the global wheat price, a stock market trader must sell stocks at the current market price.

non- competitive/ imperfect competition market

• Few sellers or buyers.

• Large price variations (firms are price setters).

• Product differentiation (e.g., branding, unique features).

• Barriers to entry and/or exit exist.

• Firms have market power - they can control prices by adjusting supply, demand or both.

  e.g. apple can set high prices for iphones because of their strong branding, monopoly companies e.g. local energy providers control prices due to lack of competition.

market power

a company's relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand or both.