3. What is an economic system?
3
An economic system is the way in which an
economy is formed based on their
characteristics, features, culture and
traditions etc.
4. What are the reasons for the
existence of variety of economic
systems?
4
Variety in resource allocation
Difference in ownership of resources
Differences in culture
Difference in governing body i.e state or private
sector
Difference in traditions
5. What are the various types of
economic systems?
5
Command/planned/socialistic economy
Market economy
Mixed economy
Transitional economy
6. Command/planned/socialistic
economy
6
State ownership of resources/factors of
production except labour
Less disparity of income
Decisions are taken by a centrally planned
authority
All activities are controlled by the government
Less/no competition
Based on social welfare
No consumer sovereignity
7. Market economy
7
Private ownership of resources, factors of
production
Existence of a price mechanism
Consumer sovereignty
Competition between both consumers and
producers
Based on self interests
Entrepreneurs are based on the motive of
profits
9. Price mechanism
9
The system in which the basic economic
problems are solved with the use of price can
be simply known as price mechanism
There are three functions of price in a market
economy.
They are
Signaling function-gives information
Incentive function-gives a motive
Rationing function-allocation idea
10. Invisible hand theory
10
In a market economy the free market forces
decides the prices and quantities of goods and
services to be produced
The buyers and producers decisions are
affected by their self interests
Consumers; maximum utility
Producers; maximum profits
These producers and consumers decisions are
contradicting to each other and they are
controlled by the price
Thus price is called an invisible hand in a
market economy.
12. Transitional economy
12
A transition economy or transitional economy is
an economy which is changing from a centrally
planned economy to a market economy.
