Every economy is faced with a fundamental economic problem. In every economy, whether rich or poor, there are limited resources and unlimited wants i.e., the resources of a country are not enough to satisfy the wants of all its citizens. Since the resources of a country is limited and wants unlimited, choices will have to be made. For example, the government may have to decide whether to spend more money on schools, hospitals, transportation or on road work. The process of choice begins with a scale of preference. This is a list of all options in order of preference. For example
Scale of Preference:
The option to build hospitals being placed at the top of the scale of preference indicates that this choice is most preferred as it yields the greatest satisfaction from the resources to be spent. Transportation is the opportunity cost of this choice as it is the second most preferred option that had to be given up to accommodate the building of hospitals. Opportunity cost is defined as the next best alternative foregone as a result of making a choice.
An economic system is a programme that a country uses to organize production and the distribution of goods and services, to maximize the benefits to its society. Economic systems vary worldwide. In this lesson we will discuss four types. These are the Subsistence, Free Market, Planned and Mixed economic systems. Governments choose particular economic programmes that will effectively manage their economies, bring about economic growth and improve the lifestyles of its citizens. The following economic questions must be answered by managers of economies.
1. What to produce?
2. How much to produce?
3. What methods of production are to be used?
4. How will goods and services be distributed?
Answers to questions 1, 2, & 4 will depend on the economic system of each country.
Subsistence Economic Systems
The Subsistence economic system as its name suggests are economies in which just enough is produced by its citizens for their survival. Since there is no surplus wealth is not created. Subsistence economies exist in many villages in Africa and South America among peoples who live in simple societies.
Free Market Economic System also called Free Enterprise or Laissez Faire
Private individuals own the greater share of the property and capital resources that are used in the production process. There is little or no government intervention in the economic activities of the country. The government may provide essential services e.g. transportation and water. Therefore the private sector provides the majority of goods and services.
-Competition among business will result in increased quality of output and lower prices.
-Competition also leads to innovation i.e. newly invented goods, services and production processes.
-Consumers are free to choose the goods and services that they wish to purchase and therefore production is based on their demands.
-Consumer exploitation by suppliers may go unchecked by government as there is little or no government intervention.
-There is an unequal distribution of wealth as goods are purchased by only those who can afford it.
-In the case of no government intervention public goods such as postal service, streetlights and roads are not provided
The Planned or Controlled Economic System
Property and capital resources are owned by the government on behalf of the society. The government makes all decisions concerning the use of the country’s resources and the distribution of its output. Goods and services are provided through government-owned and run operations. These include factories, telephone services, newspapers, television stations, etc.
-There is a fair distribution of goods and services as the government determines how goods are distributed.
-Citizens in these economies enjoy a least a basic standard of living as the government provides all goods and services.
-Resources are inefficiently allocated as consumers are not free to indicate their demand for goods and services. Therefore resources are not sent to where they are most needed but into industries based on the government’s decision.
-The lack of competition reduces innovation and the motivation to produce quality output.
The Mixed Economic System
The private and public sector are both involved in the production of goods and services.
The economic resources are owned by government and private individuals.
-Consumer protection through the regulation of businesses by government.
-Economic benefits of competition coupled with goods and services provided by government for those who cannot afford to access these through the market system.
-Public sector companies tend to be inefficient as they are supported by taxpayer’s money.
-Government regulatory policies may reduce the enthusiasm of the private sector e.g. the setting of prices of goods and services resulting in the closure of businesses.