Economic Systems CAPE

1. Discuss FOUR types of economic systems.
2. Describe the features of economic systems
3. Examine the advantages and disadvantages of FOUR economic systems
4. Identify examples of different economic systems.
OBJECTIVES

• An economic system is a complex network of agents
in society, who attempt to solve the basic economic
problem of scarcity.
• There are four basic types of economics systems:
• Traditional
• Command/planned
• Free market
• Mixed
WHAT IS AN ECONOMIC SYSTEM?

• This economic system is based on traditions and
customs, where the population is engaged in
subsistence production, i.e they produce just enough
to survive.
• There is very little surplus for exchange.
TRADITIONAL

• Main actors- consumers
• Motivation- consumers are driven
by survival and therefore self-
interest
• Ownership of resources- factors
of production are owned by
private individuals and allocated
according to the needs of
individuals
FEATURES

1. The basic economic questions are already answered
because there is direct production, so people provide
what they want
2. Crime is relatively low since individuals focus on
survival.
ADVANTAGES

3. There is very little environmental degradation.
Production methods are sustainable

1. There are fewer choices for individuals because there is a
limited range of goods and services available.
2. There is an inadequate use of skills relative to the resources
available, because skills are predetermined. The daughter of a
seamstress can have the innate abilities (good recall, above
average intelligence) that would enable her to b a doctor. But
because of custom, she has to be a seamstress.
DISADVANTAGES

3. Risk taking is rare because failure can lead to
starvation if crops fail

• This is a system where the majority of the resources
are owned, planned and controlled by the state.
• The state decides the main priorities of the society.
• Everyone cooperates for the common good of the
society.
COMMAND OR PLANNED

Main actors- planners(government),
consumers, workers
Motivation- all actors are assumed to
be selfless and cooperate to work
for the common good of society
FEATURES

 Ownership of resources- labour is owned by the private individuals even
though it is directed by the state.
 Some private individuals can own small businesses like bakeries. Other
resources are owned by the state.
 Resources are allocated through the planning process.
 Prices are limited by planners so that goods are affordable to all.

1. Government controlled prices do not fluctuate.
2. Vulnerable members of society (elderly, minorities)
are cared for.
ADVANTAGES

3. Basic needs of society are met.
4. There is no wasteful competition (like advertising)
since the state controls production
ADVANTAGES

1. There is limited choice for consumers.
2. There is little incentive for enterprise and
innovation because volume targets are set. There
is no reward for producing extra.

3. The environment may be degraded because in
meeting volume targets planners may not factor in
damage to the environment.
4. Planning may be inaccurate since it is difficult to
forecast the needs of the members of the society.

1. This system is based on free trade and resources are
allocated via the market mechanism.
FREE MARKET

 Main actors- consumers, producers, owners of private property and
government
 Motivation- consumers, producers and property owners are motivated by pure
self-interests. Government is motivated by considerations of the good of the
community
FEATURES

 Ownership of the factors of production- nearly all resources are owned by
private individuals and organisations. Government upholds the rights of citizens
to own property through the legal system.
 Competition- this exists wherever economic units freely allocating resources as
they see fit

Market mechanism- changes in the market forces (supply and demand) will
cause changes in price.
These price changes lead to changes in the way resources are used.
Changes in prices act as a signal to producers and consumers, and
cause them to change their plans

Role of government- government has
limited but key roles in a market economy.
These include:
1. Provision of public goods (like
defence, the judiciary and police
force) paid for by taxes
2. Issuing currency and maintaining its
value
3. Ensure an adequate legal framework
for the allocation and enforcement of
property rights

1. Consumers have a wide range of
choices since there are more
suppliers.
2. There is a strong incentive to
innovate and produce high quality
products.
3. There is a high level of competition.
ADVANTAGES

1. There is inequality of income with the
haves and the have-nots.
2. The wide range of choice is only
available to those who can afford it.
3. Firms can influence prices by restricting
output.
4. Since firms are driven by profit the level
of environmental degradation tends to
be high.
DISADVANTAGES

1. This system has a combination of public and private
sector ownership and control of resources.
2. The public sector provides the goods and services
which are not effectively provided by the private
sector.
MIXED

 Main actors- consumers, producers, government and factor owners
 Motivation- in the private sector consumers, producers and factor owners are
motivated by self-interest. The public sector is motivated by the ‘good’ of the
community.
 Ownership of the factors of production- partly owned by private
individuals and organisations as well as the state.
FEATURES

 Competition- this exists in the
private sector.
 Role of the government-
Government regulates economic
activities of the private sector,
uphold property laws, provides
public and merit goods,
ownership of key industrial
railways, postal services.

1. It ensures that citizens have a minimum standard of
living.
2. Since resources are allocated by both the private and
public sector, it means that when the private sector
fails to provide a good or service, it is provided by
the state.
3. There is less environmental degradation than in the
command or free market economic systems. The
state will intervene to protect the environment for
future generations.
ADVANTAGES

Economic Stability- because of
fluctuations in economic activity the
government can intervene (with the
aid of the Central Bank) to reduce
expenditure when demand is too
high (by increasing taxes and
restricting credit) or stimulate the
economy when demand is too low
(by reducing taxes or giving tax
incentives , releasing credit controls
and increasing government
expenditure)

1. Corruption may damage relations between public and
private sectors.
2. Private sector may evade taxes and regulations.
DISADVANTAGES

Inequitable distribution of income
because of the market aspect of the
system

TRANSITIONING ECONOMIES
In the past four decades, there was a transition of
planned economic systems to mixed economic systems.
Reasons include:
1. Government controlled prices may have been too low
to allow businesses to be profitable
2. The planning process takes time. Demands of the
population may change. Therefore, there would have
been inefficiencies hence surpluses or shortages might
arise.
3. The government would have to finance certain
industries to meet the needs of the population.
Increasing populations will put increased pressure on
government budgets. The government cannot run
deficits indefinitely.

CAN YOU THINK OF ANY EXAMPLES OF
THE FOUR ECONOMIC SYSTEMS
The following slides have images which are designed as hints for examples of
each economic system.

CAN YOU THINK OF ANY EXAMPLES OF
THE FOUR ECONOMIC SYSTEMS
Traditional

Free market
This man has been _ _ _ _ _ _ _ _ : Skull Island

Economic System Example
Traditional Papua new Guinea, Regions in the Amazon
Planned North Korea, Cuba
Free market Hong Kong (close approximation)
Mixed Barbados, St Lucia

Economic Systems CAPE

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