The document discusses different economic systems and their key characteristics. It describes three basic economic systems: the traditional or agrarian system which relies on social traditions; the planned system where the government controls major economic decisions; and the market system where independent actors make decisions. It also discusses mixed systems that combine elements of market and planned systems. Modern economies often follow a mixed system approach with government intervention to address market failures. The document also provides an overview of the Islamic economic system which incorporates Sharia law and aims for equitable distribution of wealth.

1. PSCI 1500:
Introduction to Economics
Basic Economics Decision

2. BASIC ECONOMIC DECISIONS
3 basic economic questions that determine the
important decision regarding production &
distribution.
1. What goods and services to produce and in what
quantities?
2. How to produce these goods and services, or how
to use the economy’s resources?
3. Who gets these goods and services (To whom)?

3. ECONOMIC SYSTEMS
 Defined as an organized way in which a state or
nation decide on utilizing the allocation of its
resources, goods and services into the society.
 Method or coordination by the state or nation to
organize relationships among market players i.e.
businesses, households, and government.
 Among the economic systems, the most
distinguishable - Agrarian (traditional) system,
Planned system, Market system and Mixed system
(the most relevant in modern day).

4. RELATIONSHIP : SCARCITY, BASIC ECONOMIC
DECISIONS& ECONOMIC SYSTEMS

5. AGRARIAN ECONOMIC SYSTEM
 Also known as traditional or subsistence economy,
favours equitable distribution of land.
 Allocate a larger distribution of goods and services
to those with a defined social status within the
society.
 Rely on historical, social, political, or religious
arrangements or tradition for decision making.
 Fairly small, close, and rural, and they often work
to support all members.

6. AGRARIAN ECONOMIC SYSTEM

7. PLANNED ECONOMIC SYSTEM
 Also known as socialism, communism, or
command system
 Rely on planning authority (central policy planner
or a government) for all major economic decisions
 Planning authority decides on what goods and
services to be produced by the nation
 Planning authority will instruct enterprises on how
to produce various items.
 Planning authority also decide who to get the
goods and services
 In a planned economy, most enterprise/business
firms are owned by the central planning authority

8. PLANNED ECONOMIC SYSTEM

9. PLANNING FAILURE
 Planning failure or government failure refers to
problem to the society or inability to achieve
society’s goals which was created by the
centralized planning system. Also known as non-
market failure.
 Government intervention can sometimes fail to
meet objective, or make existing policy problems
worse.
PLANNED ECONOMIC SYSTEM

10. Examples of Government Failure
 Distortion of markets – i.e. minimum wage,
subsidies, shortages and surplus
 Disincentive effects – i.e. high taxes hamper
business expansion, welfare benefits reduce
incentive to work
 Short ‘termism’ – solving the ‘hot topics’ of the day
rather than the long term important issues
 Regulatory capture - regulatory agencies become
dominated by the firms they are supposed to be
regulating
PLANNED ECONOMIC SYSTEM

11.  The economic system where the people extensively
engaged in free enterprise, in which is why market
economies are often associated with capitalism.
 Rooted in the belief that decisions are best made
by individuals, thus private property rights are
essential to this system (Adam Smith, The Wealth
of Nations).
MARKET ECONOMIC SYSTEM

12.  Also known as the price system as it utilized the
pricing system for economic decision making.
Independent buyers & sellers (households &
business) in the marketplace determine what to
produce.
Businesses decide on the least-cost method of
production.
Distribution (access to goods and services) is
based on the ability to pay, which is determined by
the resources that the people offer to businesses.
MARKET ECONOMIC SYSTEM

13. A pure market economy can best be illustrated by
using the following Circular Flow Model.
MARKET ECONOMIC SYSTEM

14. COMPETITION & THE “INVISIBLE HAND”
 Competition is the mechanism of control for the
market system.
 It not only guarantees that industry responds to
consumer wants, but it also forces firms to adopt
the most efficient production techniques.
 Adam Smith wrote about the “invisible hand” which
promotes public interest through a market system
where the primary motivation is self-interest.
 By attempting to maximize profits, firms will also be
producing the goods and services most wanted by
society.
MARKET ECONOMIC SYSTEM

15. MARKET ECONOMIC SYSTEM

16. MARKET FAILURE
 Market failure refers to the situation where market
system creates problem to society or fails to
achieve society’s goals.
 In any given market, the quantity of a product
demanded does not equate to the quantity
supplied, or situation where the market mechanism
fails to allocate resources efficiently.
MARKET ECONOMIC SYSTEM

17. MARKET FAILURE
 The social costs of producing the good or service
(all of the opportunity costs of the input resources
used in its creation) are not minimized, resulting in
waste of some resources.
 Market failure will eventually lead to the
government intervention in the market.
MARKET ECONOMIC SYSTEM

18. Among the market failures are:
 Imperfect information (ignorance on price, cost,
benefits and long term value effects, etc.)
 Oversupply of demerit goods and under-supply of
merit goods
 Market power leads to monopoly
 Certain services/goods would or could not be
provided in sufficient quantity by the market
 Externalities due to existence of external costs
and benefits
MARKET ECONOMIC SYSTEM

19. Society frequently turns to the government to
address market failure. Among the reasons
government step in:
To correct shortages or surpluses in the market
To provide what the market does not or can not
To regulate and correct inequality or inefficiency
To protect individuals and groups in society
To provide a safety
To reduce poverty
GOVERNMENT INTERVENTION IN MARKET
ECONOMIES

20. How does government intervene?
 Taxation –provide incentive or disincentive effects
 Subsidies – to encourage production/consumption
 Regulation – guides, codes of practice, legislation,
 Property rights –intellectual property, patents, etc.
 Direct provision of goods / services – health,
education.
GOVERNMENT INTERVENTION IN MARKET
ECONOMIES

21. GOVERNMENT INTERVENTION IN MARKET
ECONOMIES

22. MIXED ECONOMIC SYSTEM
 Refers to the economic system in which economic
decisions are addressed by some combination of
market and centralized decision making.
 Pure market and pure planned economies are only
used as the basis, but neither have real-world
counterparts, and neither are perfect in their design.
 As market economies experience problems, they
tend to move away from pure market to mixed
economies, and as planned economies experience
failures, they move away from pure planned to mixed
economies.

23. MIXED ECONOMIC SYSTEM
Continuum of Economic Decision Making

24. ISLAMIC ECONOMIC SYSTEM
 Islamic Economic System belongs under the
categories of a mixed economic system.
 However, distinct characteristic is it operates within
boundary of Shari’ah law and Islamic teaching based
on Al-Qur’an & As-Sunnah.
 Important characteristic of Islamic Economic System
is the production of halal (Islamic permissibility)
goods & services, the prohibition or condemnation of
interest (riba) and the fiscal policy that levy zakat
(Islamic tax) system as the basis of taxation.

25. THE ISLAMIC VIEW ON DISTRIBUTION OF WEALTH
Islamic economic system has a very distinguishable
system for distribution of wealth. There are two kinds
of people to have a right to wealth:
1. Those who have a primary right – those who have
right to wealth directly in consequence of
participation in the process of production. In other
words, it is those “factors of production” which
have taken part in the process of producing some
kind of wealth.
ISLAMIC ECONOMIC SYSTEM

26. THE ISLAMIC VIEW ON DISTRIBUTION OF WEALTH
2. Those who have a secondary right – those who
have not taken a direct part in the process of
production, but charged upon the producers or the
owners of factors of production to make them co-
sharers in their wealth, principle is that wealth
should not become concentrated in few hands.
ISLAMIC ECONOMIC SYSTEM