Definition And Meaning Of Economic System: Types Of Economic Systems And Their Advantages And Disadvantages

Economics

  • Meaning Of Economic System
  • Types Of Economic System
  • Definition Of Capitalist Economy
  • Major Features Of Capitalist Economy
  • Advantages Of The Capitalist System
  • Disadvantages Of The Capitalist System
  • Definition Of The Socialist System
  • Main Features OF The Socialist Economy
  • Advantages Of The Socialist Economy
  • Disadvantages Of Socialist Economy
  • Definition Of The Mixed Economy
  • Features Of Mixed Economic System

Definition Of Economic System

An economic system is the mechanism or means whereby a society is able to carry out the tasks of production and distribution. It is the way economic activity is organised in order to solve the basic economic problems of what to produce, how to produce and for whom.

Types Of Economic System

There are three types of economic system, namely:

1. The capitalist economy.
2. The specialist economy.
3. The mixed economy.

The mixed economy is a combination of the features of the capitalist and the socialist economics.

1. The Capitalist Economy

The capitalist economic system or capitalization is also called the three market economy. It is an economic system based on the private ownership of the means of production, distribution and exchange.

Major Features Of Capitalist Economy

The capitalist economic system has the following features:

1. Individuals have a right to own a private property such as land buildings machinery and other factors of production.

2. Decision regarding on what to produce, how to produce and how much are being taken by private profit seeking individuals.

3. Consumers are also free to choose what to buy with their money.

4. Economic units (producers, consumers, workers, land owners) etc attempt to do what promotes their self-interest.

5. There is competition among producers and among consumers.

Advantages Of The Capitalist System

1. Competition leads to efficiency in the use of resources. There is therefore increased production and economic growth.

2. There is no need for human control of the economy because the price system works as an automatic mechanism.

3. It facilitate rising standard of living.

4. Producers and consumer’s enjoy economic freedom which also promotes political freedom.

Disadvantages Of The Capitalist System

1. Goods and services are distributed according to the ability to pay and not according to need.

2. There is a wide gap between the rich and the poor.

3. Society is divided into capitalist (owners of the means of production) and workers and this often results to conflicts.

4. The capitalist system is prone to instability in the form of inflation, unemployment etc.

2. The Socialist System

The socialist economy is also called the “command economy” or the “coatrally planned economy”. It is the economic system whereby the decisions regarding what? How much? How and whom to produce are taken by, an all powerful planning authority. This planning authority estimates what the people want directs resources into producing them and decides how the goods produced shall be distributed among the community. Example of countries operating this type of economy are Russia, China etc.

Main Features Of The Socialist Economy

1. The means of production are owned by the state i.e land, housing, factories etc are publicly owned.

2. Production and distribution of goods and services are centrally planned.

3. Wages is the only form of personal income since every worker is employed by the state. Nobody earn’s rent, interest or profit because nobody owns private property.

Advantages/Merits Of The Socialist Economy

1. The central planning authority ensures that adequate resources are devoted to the production of commodities and public goods such as housing, transportation, education, health etc.

2. The monopoly powers of the state are used in the interest of the people E.g to secure the advantages of large scale production and dominate the wages of competition.

3. Every workers is directed on where to work and so there is no unemployment.

4. Income is more equally distributed according to need.

Disadvantages/Demerits Of Socialist Economy

1. A planning committee cannot estimates accurately the individuals wants of the people.

2. The use of officials in directly production and distribution may lead to red-tapism. Decisions are taken slowly and often there is corruption.

3. State-ownership of resources reduces personal incentives and diminishes efforts and initiative.

4. There is risks of political domination or dictatorship by the officials who control’s the state and make economic decisions for others, Individuals would exense for the state and not the state for individuals.

3. The Mixed Economy

The mixed economy is a mixture of the capitalist and the socialist economics. It is an attempt to get the best of both ward in a mixed economy part of the production carried out by the private sector through the market forces while parties carried out by the government through the public sector.

The private sectors includes those firms which are privately owned and where decisions are taken in response to market signals to profit and has public sector includes government, department, local authorities, public co-operation and public institutions from the public sector, the government must exercise control over the entire economy.

So a greater or lesser extent, all the economics of the world are mixed economics.

Features: Government participates extensively in the regulation, management and supervision of economic activities in the country.

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