Economic systems with definition. Types of Economic systems.

1. Economic Systems
An Economic system is the system of production,
distribution and consumption of goods and services of an
economy. It is the set of principles and techniques by which
problems of economics are addressed, such as the economic
problem of scarcity through allocation of finite productive
resources. The economic system is composed of people and
institutions, including their relationships to productive
resources.

2. There are three basic economic systems
1. Capitalism
2. Socialism
3. Mixed Economy

3. What is Capitalism?
Capitalism refers to an economic and social system in
which the means of production (capital) are privately
controlled; labor and goods are traded in free market
and profits are regularly reinvested in new ventures.
Pure capitalism has always only existed in theories
Capitalism has been dominant in western world since the
end of feudalism.
The desire for profit is the sole consideration.
(Ref: p.816-825, Dewett K K, Modern Economic Theory)

4. Features of Capitalism
• Right of Private property
• Freedom of enterprise
• Freedom of choice by the consumers (consumer sovereignty)
• Profit motive
• Class conflict (Haves and have nots) – economic inequalities
• Un- coordinated nature
• Vital role for entrepreneur
• Control with risks – he who risks his money must also control
the business
• Perfect competition
• Importance of price system

5. Demerits of Capitalism
• Wasteful competition
• Human welfare ignored
• Economic instability and unemployment
• Property rights take precedence over human rights
• Class conflict
• Social injustice and economic inequality
• Misallocation of resources
• Emergence of monopolies and concentration of economic power
• Malpractices

6. Socialism
Socialism is an economic organization of society in which the
material means of production are owned by the whole
community and operated by the organs representative of, and
responsible to, the community according to general plan, all
members of the community being entitled to benefits from the
results of such socialized planned production on the basis of
equal rights.
(Ref. p. 826-844)

7. Features of Socialism
 Social ownership of means of production
 No private enterprise
 Economic equality
 Equality of opportunity
 Economic planning
 Social welfare and social security
 Classless society

8. Merits of Socialism
 Social justice
 Better allocation of resources
 Improving productive efficiency
 Social security and welfare
 Economic stability
Demerits
• Bureaucracy and red tapism
• Not successful in business
• Insufficient resources
• Misallocation of resources
• Loss of consumer sovereignty
• Lack of incentives
• Loss of economic freedom
• Concentration of power in the state
• Loss of personal liberty

9. Mixed Economy
Mixed economy is an economic system which is neither pure
capitalism nor pure socialism but a mixture of the two. In the
system we find the characteristics of both capitalism and
socialism.
(Ref. p.845-850)
Main features
• Co-existence of the public and private sectors
• Role of price system and government directives
• Govt. regulation and control and private sector
• Consumers sovereignty protected
• Govt. protection of labor
• Reduction of economic inequalities
• Control of monopoly.

10. Market Economy
• A market economy is an economy based on the division of
labor in which the prices of goods and services are determined
in a free price system set by supply and demand. This is often
contrasted with a planned economy, in which a central
government determines the price of goods and services using a
fixed price system. Market economies are contrasted with
mixed economy where the price system is not entirely free but
under some government control that is not extensive enough to
constitute a planned economy.

11. Third World Economies
• The economically underdeveloped countries of Asia, Africa,
Oceania, and Latin America, considered as an entity with
common characteristics, such as poverty, high birthrates, and
economic dependence on the advanced countries. The French
demographer Alfred Sauvy coined the expression ("tiers
monde" in French) in 1952 by analogy with the "third estate,"
the commoners of France before and during the French
Revolution-as opposed to priests and nobles, comprising the
first and second estates respectively.