Economic Systems

Picture by: Pauljavor

While there are some basic types of economic systems in the world only a few countries today practice only one economic system. All the other countries practice a system that is mixed; consisting of the principles of different economic systems.

COMMAND ECONOMY

While there are some basic types of economic systems in the world only a few countries today practice only one economic system. All the other countries practice a system that is mixed; consisting of the principles of different economic systems.

FEATURES OF A COMMAND ECONOMY

1. PUBLIC OWNERSHIP : All economic resources are publicly owned.

• All types of capital are owned by the state.
• Private ownership is limited.
• In order to distribute income and wealth equally resources are publicly owned.
• Personal income cannot be derived from the ownership of property.

2. PLANNED PRODUCTION: A national plan is made for all the economic activities that needs to be carried out.

• Government directives are allocated to distribute resources.
• Economic questions are answered by the state.

3. PRICE :  Prices are fixed by the government.

• Prices do no change in response to changes in demand and supply.

4. AIM OF PRODUCTION: Production is carried out for the welfare of the people rather than to maximize the profit. 

Below are some advantages and disadvantages of a command economy.

Advantages	Disadvantages
Because the ruling government makes a plan for the economic activities that needs to carried out these activities are free from instability.	Less variety of products since only a limited range of good and services are provided.
Income and wealth are equally distributed.	The quality of the products are low since no competition exists in the market.
The ruling nation has command over its economic activities.	Lack of innovation and invention because the profit motive is taken away by the government.

FREE MARKET ECONOMY

Briefly free market economy is a system in which economic questions are answered by the price mechanism. Price mechanims is the fluctuation in supply and demand for good and services provided.

FEATURES OF A FREE MARKET ECONOMY

1. PRIVATE OWNERSHIP: Individuals have the right to own property or assets also having the right to get income from the asssets.

2. FREEDOM OF CHOICE: 

• Individuals have the freedom to establish businesses themselves.
• Producers have the freedom to change their products according to customer preferences.
• Workers have the freedom to get employed and resign.
• Consumers has the freedom to spend their income however they please.

3. SELF INTEREST: An economy which encourages individuals to do what is right for them.

• Firms are established to maximize profits.
• Workers have the freedom to maximize their earnings.
• Consumer try to maximize their satisfaction.

4. PROFIT MOTIVE: The main objectives of a free market economy is to maximize profit.

5. CONSUMER SOVEREIGNTY: In a free market economy the consumers are considered as kings since the producers will only produce those products which the consumers want.

 6. LIMITED ROLE OF THE GOVERNMENT: Since the economic questions are answered by the price mechanism the role of the government is limited to maintaining defense and justice in the country.

Below are some advantages and disadvantages of a Free market economy. 

Advantages	Disadvantages
Prompt response to the wants of consumers sine they influence the production.	Due to the ample amount of freedom received by the producers some people may have excess amount of market power leading to inequalities on the distribution of income and wealth.
A wide range of products are in the market since producers are encourage to produce products which the consumer wants through the price mechanism and freedom of enterprise.	Since price mechanism plays a huge role in what to be producer the lower class may not have the goods and service they require since they lack the purchasing power.
More freedom of choice to both the producers and consumers	Encourages the consumption of harmful goods. For example : drugs and alcohol.
The government interference is low in the areas of economics thus making it easier for foreign investors to invest in the economy.	Market is dominated by huge firms therefore its limits the competition and consumers are exploited due to the high prices.

MIXED ECONOMY

Mixed economy is described as a system in which both private and public sector operates for the welfare of the people. 

FEATURES OF A FREE MARKET ECONOMY

1. Existence of both public and private sector: The private sector encourages the freedom of choice, private ownership, price mechanism and profit motive. The public sector maintain law and order ensuring the economic stability of the economy.

2. Co-ownership of industries:  Some organization are owned by the government with an aim to maximize profit.

3. Reduction of economic inequalities: When the government introduce taxes and subsidies they are able to balance income and wealth amongst the economy.

Below are some advantages and disadvantages of a Mixed economy.

Advantages	Disadvantages
Price mechanism allows for resources to be allocated in a good manner.	Conflicts between the sectors creates difficulty to operation the system.
Effective planning leads to effective use of the economic resources.	It allows for corruption and black markets.
Economic efficiency is increase due to the freedom of choice, profit motive and competition.	If the government poses too much control over the private sector individuals will be discourages as well as organizations.

TRANSITIONAL ECONOMY

Transitional economy is described as an economic system that is changing from being one under the control of the government to being a market economy. 

FEATURES OF A TRANSITIONAL ECONOMY

1. Inefficiency in the allocation of resources: : Prices of the products does not reflect the scarcity of the products thus with low prices there is shortage of resources. 

2. Production inefficiency: The government attitude to be self-sufficient and avoiding trade with other countries results in productive inefficiency. 3. Rising inflation: Since the prices of the products does not have control; does not depend on the scarcity of the product or other price control mechanisms it rises inflation.

4. Corruption: Due to the neglect of the government towards adopting a sophistical legal system no right are protected and regulated which allows entrepreneurs to exploit their position to get higher profits by increasing the prices. 

Below are some advantages and disadvantages of a Transitional economy.

Advantages	Disadvantages
Due to the neglect of the government towards adopting a sophistical legal system no right are protected and regulated which allows entrepreneurs to exploit their position to get higher profits by increasing the prices.  Opportunity for trade agreements during the transition period which enables the government to pay for the technology and improvements in infrastructure.	Open the doors for dramatic inflation during the transition.
Open immigration policies allows people to travel to other countries to seek job opportunities.	Lack of entrepreneurship and skills.
The government has total control over the means of production.	Economic transitions leads to a massive inequality amongst citizens. Rises the chance for traders to exploit their position.

Advantages

Disadvantages

Because the ruling government makes a plan for the economic activities that needs to carried out these activities are free from instability.

Less variety of products since only a limited range of good and services are provided.

Income and wealth are equally distributed.

The quality of the products are low since no competition exists in the market.

The ruling nation has command over its economic activities.

Lack of innovation and invention because the profit motive is taken away by the government.

Advantages

Disadvantages

Prompt response to the wants of consumers sine they influence the production.

Due to the ample amount of freedom received by the producers some people may have excess amount of market power leading to inequalities on the distribution of income and wealth.

A wide range of products are in the market since producers are encourage to produce products which the consumer wants through the price mechanism and freedom of enterprise.

Since price mechanism plays a huge role in what to be producer the lower class may not have the goods and service they require since they lack the purchasing power.

More freedom of choice to both the producers and consumers

Encourages the consumption of harmful goods. For example : drugs and alcohol.

The government interference is low in the areas of economics thus making it easier for foreign investors to invest in the economy.

Market is dominated by huge firms therefore its limits the competition and consumers are exploited due to the high prices.

Advantages

Disadvantages

Price mechanism allows for resources to be allocated in a good manner.

Conflicts between the sectors creates difficulty to operation the system.

Effective planning leads to effective use of the economic resources.

It allows for corruption and black markets.

Economic efficiency is increase due to the freedom of choice, profit motive and competition.

If the government poses too much control over the private sector individuals will be discourages as well as organizations.

Advantages

Disadvantages

Due to the neglect of the government towards adopting a sophistical legal system no right are protected and regulated which allows entrepreneurs to exploit their position to get higher profits by increasing the prices.  Opportunity for trade agreements during the transition period which enables the government to pay for the technology and improvements in infrastructure.

Open the doors for dramatic inflation during the transition.

Open immigration policies allows people to travel to other countries to seek job opportunities.

Lack of entrepreneurship and skills.

The government has total control over the means of production.

Economic transitions leads to a massive inequality amongst citizens. Rises the chance for traders to exploit their position.