The document discusses four major economic systems - capitalism, socialism, mixed economy, and Islamic economy. It provides details on the central problems faced by economies, the fundamental theories and characteristics of each system, and some common criticisms. Capitalism is based on private ownership and free markets, while socialism emphasizes collective ownership and central planning. A mixed economy combines public and private aspects. Islamic economy blends private pursuit of interests with equitable distribution of income and prohibition of interest.

1. Economic Systems: four Major
Economic Systems
Chapter 4

2. What is the economic system
• An economic system is a set of principles on which an economy
operates and makes decisions regarding to the central problems. Need
of the system is formed by scarcity of resources and unlimited wants.
• Economic system gives frameworks for the distribution and allocation
of goods and services in a nation or society. economic systems deal
with the central economic problems that every economic entity faces.

3. Central Problems of an Economy
• The central problems of an economy revolve around that the resources
are scarce to fulfill the unlimited wants.
• The scarcity of resources creates a dilemma for economic managers
who have to make a choice from among the set of alternatives.
• To make the economic choices, economists and economic managers
confront following questions:

4. What to Produce?
• This problem involves selection of goods and services to be produced
and the quantity to be produced of each selected commodity.
• Every economy has limited resources and thus, cannot produce all the
goods. More of one good or service usually means less of others.
• Guiding Principle of ‘What to Produce’: Allocate the resources in a
manner which gives maximum aggregate satisfaction.

5. How much to produce?
• After deciding the goods to be produced, economy has to decide the
quantity of each commodity that is selected. It means, it involves a
decision regarding the quantity to be produced.
• Not all of the goods and services can be produced with the
given set of human, physical, technical resources and capital.
• Countries have to choose between a long list of goods and
services, If all the resources are devoted for producing only one good
or service, no resources will be left to produce other goods and
services.

6. How to Produce?
• Refers to selection of technique to be used for production of goods and
services. A good can be produced using different techniques of
production.
• Generally, techniques are classified as: Labor intensive techniques
(LIT) and Capital intensive techniques (CIT).
• Labor intensive technique refers more labor and less capital.
• Capital intensive technique, there is more capital and less labor
utilization.

7. For Whom to Produce?
• Refers to selection of the category of people who will ultimately
consume the goods. Goods are produced for those people who have
the paying capacity.
• The capacity of people to pay for goods depends upon their level of
income. It means, this problem is concerned with distribution of
income among the factors of production.

8. Types of economic systems
• The point of the difference in the economic systems is all about the
means to tackle the economic problems discussed above.
• There are four major economic systems, applied by the various nations
in the world. Systems are:
• Capitalism
• Socialism
• Mixed Economy
• Islamic Economic System

9. Capitalist Economic System
• An economic and political system in which a country’s trade and
industry are controlled by private owners for profit. Capital is needed
for technological advancements for production and consumption and
for governments to expend on development.
• In the capitalism Private firms or individuals own means of
production. They make choices about:
• What to produce
• How to produce
• For whom to produce

10. Fundamental theories of the Capitalism
• Right of Private Property
• In a capitalistic economy, people have the right to own assets and
conduct business. Within legal limits, they have the complete freedom
to enter into any business activity be it socially or morally correct or
not.

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• No Government Intervention
• Government does not intervene or its intervention is very
minimal. Businesses are allowed to produce anything and charge
any price they wish as long as they can find buyers who can afford
their goods and services.
• Capitalist seeks maximum return for the capital and keeps all things
secondary to it.

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• Dependence on Invisible hand
• It is assumed that every person acting in his/her own benefit will keep
the economy running in an efficient way.
• Everyone is allowed to work in his/her benefit and is not obliged to
think about society and its needs.
• It is assumed that social objectives will be met with people working
for their own benefits.

13. Critics of the Capitalism
• Inequality
• capitalism is associated with the unfair distribution of wealth and
power. market monopoly or oligopoly results social alienation,
economic inequality, unemployment, and economic instability.
• Market failure
• Market failure is a term used by economists to describe the condition
where the allocation of goods and services by a market is not efficient.
Market failure is attributed to the factors including; monopolies,
monopsonies, insider trading, and price gouging

14. Socialist Economic System
• An economic and political system based on public or collective
ownership of the means of production.
• Socialism emphasizes equality rather than achievement, and values
workers by the amount of time they put in rather than by the amount
of value they produce.
• China, Vietnam and Cuba are examples of to day socialist societies.

15. Fundamental theories of Socialism
• Collective property
• In a socialist economy, there is no right to own private property.
All the property collectively is in the ownership of the socialist
government in the country.
• Centralized Economy
• All the decision-making authority rests with the government. No one
else is given the authority to make the economic decisions even for
oneself.

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• Decisions in Collective Interest
• All the decisions are made by the government in the collective interest
of a socialist country. People are directed to follow the instructions
of the government and are not allowed to object to any decision
or policy of the socialist government.
• Reduced Income Inequality
• Government makes the decisions about the wages arbitrarily. The
wages are forced to remain in parity in all fields. Government tries
to keep income equality through setting the wages and
disallowing any objection or bargaining.

17. Critics of Socialism
• Slow economic growth due to the less entrepreneurial opportunity
and competition, and a potential lack of motivation by individuals due
to lesser rewards.
• distorted or absent price signals; results in reduced incentives that
causes reduced prosperity, as well as negative social and political
effects.
• Absence of the private ownership; which is means of production
and the market exchange as natural entities, which is also central to
their conceptions of freedom and liberty.

18. Mixed Economic System
• Mixed economy is a compromise between capitalism and socialism. a
mixed economy takes the valuable features of both. Some mixed
economies can be tilted more towards socialism and some can be tilted
more towards capitalism.
• Mixed economic systems are not laissez-faire systems: the government
is involved in planning the use of resources and can exert control over
businesses in the private sector.

19. Fundamental Postulates of Mixed Economy
• Coexistence of Public and Private Sector
• In a mixed economy, public and private sector work in parallel to each
other. Usually, the public sector is responsible to provide transport,
communication, defense, currency management and utilities. All the
other industries are in the ownership of private sector.
• Government Regulation and Prices
• Unlike in Capitalism, Government intervenes in the market to
regulate prices. Governments give subsidies to encourage
production of necessities and their cheap availability to the poor
masses while high tariff rates are imposed on luxuries with inelastic
demand

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• Promotion of Private Sector
• Even though the government intervenes in the hour of need, it still
provides incentive to the private sector to compete with the public
sector.
• In industries where public sector and private sector coexist,
government lets the market forces work and does not crowd out the
private sector.

21. Islamic Economy
• It is a blend of natural features present in Capitalism such as
right to private property, private pursuit of economic interest, use
of market forces, used along with some distinct features derived
through Islamic economic teachings.
• Some of the distinct features of an Islamic economic system are
discussed below:

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• Equitable distribution of Income
• Islam through the system of Zakat reduces the Gap between the rich
and poor. It is a progressive system of taxation.
• It levies a special tax on cash, cash equivalents and capital in excess of
need that makes sure that the money circulates and is used in the
productive activities.

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• Prohibition of Interest
• Islam prohibits interest to relieve the society from the
exploitation of capitalist. It encourages entrepreneurship and trade.
It relieves the society from the disincentive to produce in an interest-
based system. It encourages circulation of wealth.
• Spending in the way of Allah
• Islam directs Muslims to pay Zakat. Besides, it encourages people
towards charity to help poor and gain benefit in the hereafter. Only
with the knowledge of life after death and the belief in God.

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• Protection of Rights
• Islam unlike socialism does not put restriction on private property. It
allows people to own assets, conduct trade and business as long as
they avoid any immoral act.
• Provision of Justice
• Islam directs Muslims to abide by justice in all circumstances. It
allows access to all people to legal courts and directs the rulers to
provide justice to all the members of the society without any
discrimination.