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Economics Micro/Macro

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Assignment 1

a) Identify and describe the 3 economic systems that govern economies around the world.

3 Economic Systems

There are three types of economic systems that govern economies around the world. These are Traditional Economy, Market Economy and Command Economy.

1. Traditional Economy: This economy system is based on traditions. Economic decisions are based on customs, beliefs and traditions of the community, family, clan or tribe. At one time most people lived in traditional economies. In modern times this system still exists in rural and non-developed countries. Under this system, economic decisions are based on customs, religion and culture.. An Individual’s roles and choices are based on customs of past generations. This economic system often uses bartering and trading of goods although this may be limited because there is very little surplus produced. A disadvantage of this system is that it tends to discourage modern technology and the lack of progress tends to lower the standard of living. As a result modern technology is not prevalent in this type of economic systems The supporters of this type of economy believe that this system offers the advantage of stability and preserves the spiritual and cultural aspects of life.

To summarize individuals in this system base their decision on past customs as opposed to having the freedom in making economic choices

2. Market Economy: This system of economy is based on supply and demand. It represents a free market system where persons are free to buy and sell with no restrictions. Consumer demand is governed by the so called “demand Law” and Product supply (by manufacturers) is governed by the Supply Law” In a free market set-up, an equilibrium between demand and supply is achieved whereby product (or service) consumption quantity and trade price of products (or services) is determined.

Under the free market system, enough products would be produced in order to meet the needs of the consumers. Economic decision making is based on the concept of private ownership of economic resources and the use of market to buy or sell goods or services..

This type of system is also referred to as a Capitalistic system where households and business are participants in two markets: Resource Market (where natural resources are traded) and Product Market (where consumer products are traded). In the product market the household is the buyer of consumer products and business are the seller and in a resource market the household sells the resources (labour) to the business to produce the goods and services There is a circular flow of resources where businesses buy resources from households and use these resources to produce consumer products which are in demand by the households. The government`s role in this type of system is minimal and limited only to functions related to the legal system and public security..
3. Command Economy: This economic system is Government controlled. The system is based on central planning while natural resources and capital is in the hands of the government. The planners (not the consumers or producers) decide what should be produced, how much should be produced, how the production should be carried out, and how the output should be distributed. Central planners determine the split of how much to consume and how much, if any, to save for future needs. Households generally do not have the freedom to stray from central decision.

b) Outline the strengths and weaknesses of each system.

Traditional Economy

• Distribution of resources is based on traditional allocation.
• No surplus or waste - produces only those goods and services which are required for the survival or which they want to consume.
• People know what their roles or responsibilities are. Thus there is no duplication of effort.
• Usually are environment friendly and sustainable

• Lack of progress due to reluctance in adopting modern development and adapting to modern technology leads to inefficiency and no growth.
• Lower productivity, causing a lower standard of living.
• No choice in the job that you do, tradition dictates your role.
• Dependent on nature. Changes in weather patterns can have detrimental effort.
• Can be adversely impacted by market or command economies with significant resources impacting livelihood (e.g. creation of a dam reduces fishing)

Market Economy:

• The decision of what to produce is determined by the needs and wants of the households in their role as a consumer (consumer sovereignty).
• Consumers and producers are free to purchase or sell/produce products as they wish.
• Producers try to sell at highest price possible while consumers try to purchase at lowest price possible. The resultant supply and demand laws lead to an equilibrium price satisfying both consumers and producers which is the fair price for the product.
• Consumers benefit from better products through improvement and development of products through innovation, entrepreneurship and advancement in technology.

• Distribution of income can create significant inequities. For example physically or mentally challenged people, elderly people and children are at a disadvantage in a competitive market and may not be able to meet their basic needs without some form of government intervention.
• Concept of Profit leads to formation of Rich and Poor classes.
• Private market may not always operate in a way that benefits society as a whole. There may be negative external effects (e.g. pollution) or negative internal effects (e.g. monopoly) of economic activity.
• There could be instability in the total output produced due to changing consumer wants which could lead to variations of price and employment levels.

Command Economy:

• Income distribution among its citizens is not just based on economic considerations. Income distribution is usually more equal among society.
• Central planners making the decisions can focus on promoting the rate of economic growth by deciding on resource allocation between development and improvement in technology.
• Having access to all available resources, central planners can execute very large projects that can create industrial power or attain social goals.

• Planning for an entire economy is complicated and may be difficult for central planners to gather all information necessary to make a proper decision. Errors in estimates could result in over or under production of goods or services.
• This type of economy does not depend on profit to promote efficient use of resources therefore resources could be wasted or used inefficiently. Without the market to control individual self-interest, corruption among central planners can increase and quality of goods or service produced may decrease.
• The central power affects individual freedom. Households have limited economic choices since the decisions are in the hands of the central planner.
• Without freedom in making choices, an underground or black-market economy may flourish.
• Due to a lack of profit motivation or reward, innovation can suffer.

c) What do you think is the best type of market system to govern an economy? Why?

Mixed Economy or Modern Mixed Economy: An economic system that incorporates strengths of market economy and command economy. In this system, production decisions are made by private markets as well as by governments. This type of economy includes a private sector where economic activity is controlled by markets. The private sector also has the ability to own productive resources. This economy also includes a public sector where the government controls economic activity. In this type of economy government can always intervene in the private sector. This can be seen in by implementing taxes, providing subsidies to certain industries, or imposing regulations on the private sector such as ensuring that the environment is not being destroyed. As one can see, this is the best of all economies by combining the strengths of the market and command economy.

d) Use online resources and your textbook to identify a specific economy that follows each economic system discussed above.

Traditional Economy:

Most countries started as traditional economies but have today undergone some development and are no longer pure traditional economies. However, there are many regions that can still be considered traditional economies. Examples are the agricultural sectors in some regions of Bangladesh or Myanmar , the tea plantations in South India , most indigenous population around the world (including in developed countries) such as the Inuit in northern Canada , the pygmies from central Africa .

Market Economy: As with traditional economy, there is no country that is a true capitalistic country adhering to free market economies. The closest to a Market Economy is probably the United States of America. Canada, Great Britain, Germany.

Command System: Examples of command economy include Cuba, North Korea and Laos .

e) How have these countries done in terms of economic performance? Has one economic system produced better economic results than others? Please provide details from the countries you have selected.

As indicated earlier, traditional economy, although is practiced in regions in a country, is no longer practiced in the true format (based on agriculture, fishing, hunting) in any country. All countries in the world have made some transition into other forms of economy and operate in emerging market or third world countries. It is generally expected that these countries will eventually evolve into a market or command or mixed economy. Example of such a country is China whose economic performance has transitioned into command economy first and now into mixed market economy. Its performance has grown many folds, and it is now suspected that it may soon become the largest economy in the world.

while the command economy in the soviet union before its break-up had made substantial advancements in technology making it a super power, the same in Cuba and previous East Germany did not perform and lead to advancements.

The market economy (even though not in its purest form) has led to much economic advancement and growth in United States, Canada, UK, Japan and Germany. Lately other countries such as South Korea have seen tremendous growth via a missed market economic system.

Although command economy, under proper implementation, can lead to substantial growth, it has a disadvantage in the sense that the society in general does not have freedom to choose. This gives rise to dissatisfaction in society, which has led to displacement of the command economy by a mixed market economy as in China or Russia.

In summary, a market economy with some centralized control by Governments can provide the best environment for economic advancement and consumer satisfaction.

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