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ECO 162









Acknowledgements 2
Introduction 3
Economic system
Capitalism economy 4-7
Socialism economy 8-10
Mixed economy 11-12
Islamic economy 13-16
References 17

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Economics is one of the oldest disciplines among the humanities and is categorized as a
social science. Economics examines and analyses the economic activity of people in order
to satisfy their needs and desires. Human being wants are the starting point of economic
activities and provide the basic for economics. An economics activity refers to an activity that
helps the people to achieve economic gains, which is valued in terms of money. Human
beings have certain basic needs, e.g. food, shelter and clothing. But human beings are
never satisfied, thus there will be no end to his/her wants.

An economic system is a way of organizing the relationship among individuals, firms,
and government agencies on how to make choices when confronted with basic
economic questions (what to produce, how to produce, and for whom to produce).
There are four types of economic systems, as shown below

Economic systems

Mixed economy Capitalism


Socialism economy Islamic economy

Capitalism is an economic system where individuals make all, the main economic decisions
without any government intervention or control. Thus, this economy is characterized as
economic freedom, where an individual can be the buyer, seller, employee or employer at
his/her own wish, In this market, buyers and sellers will meet and enter into transactions.
The price system is the main mechanism for any economic activity

Characteristics of Capitalism

Characteristics Description of characteristics

Private ownership of two key individual rights -- enable private businesses
resources to operate freely without leasing land or property
from the government. The government doesn't have
the authority to seize control or manage business
operations, unless the company engages in illegal
activity. In the United States, tax laws require
business owners to pay taxes on their real estate,
equipment, inventory and profit after deducting a
variety of operating expenses and depreciating the
value of durable, long-lasting tools and equipment.
Freedom of enterprise and Capitalist countries encourage free enterprise -- an
choice economic system that promotes prosperity by allowing
private individuals and businesses to compete for profit,
according to the Center for Free Enterprise at Florida
Southern College in Lakeland. The system operates on
the principle of survival of the fittest, in which companies
that offer the best products and services for the lowest
prices -- while maintaining a high level of profitability --
typically survive. The goal is to maximize profit and
minimize cost, promoting robust competition between
businesses as they meet the demands of consumers.
Consumers sovereignty In capitalism, consumers sovereignty plays an important
role. Consumers tastes and preferences will affect the
production of goods and services.
Competition A market economy is also characterized as being highly
competitive among producers who aim to obtain the
highest profit. When producers compete among
themselves, the product will be of high quality and there
is also greater efficiency .For example, in the production
of shoes, brands such as Reebok and Nike are in
constant direct competition. In order to attract more
consumers, both producers use various marketing

strategies to maximize sales of their product.
Government intervention In capitalism, there is very limited government
intervention. The countrys role is to stabilize the
economic conditions of the country.
Price system The price mechanism is a system used to make
economic decisions. Price mechanism means the free
operation of demand and supply forces without any
intervention. All economic processes of consumption,
production, exchange, savings, investment and
distribution, work under this price mechanism system,
which is labelled as the invisible Hand by Adam Smith.

Advantages and Disadvantages of Capitalism

Advantages of capitalism Disadvantages of capitalism

Production according to the needs of Inequality of distribution of wealth and
consumers income
Producers produce goods and services Since there is no government intervention
that consumers want and this maximizes of the market economy, the system of
the needs and satisfaction of consumers private widens the gap between the rich
and the poor. Those who have wealth
can obtain resources and start
businesses while the poor only have their
labour to offer. In other words, the rich
get richer and the poor get poorer.

Economic freedom Inflation and high unemployment rate

Economic freedom means the right to Disparity of demand and supply of labour
earn and retain property. It also means a occurs since it is governed by the
freedom of enterprise and a choice of invisible hand. Business fluctuations
occupations. This will lead to the cause high unemployment rates during a
sourcing of the countrys manpower from depression
different sectors. Therefore, there is
flexible functioning of different units of

Efficient utilization of resources Lack of social welfare.
Competition creates in efficiency in In capitalism, social welfare is ignored.
production. Quality goods are produced Owners do not provide any pension,
at a lower cost, Consumers get the social security or accident benefits to
highest quality goods at a lower cost employees. There is also insufficient
since production techniques are more provision of social amenities such as
efficient. schools, hospitals and the like. In this
system undesirable social effects such as
theft and crime tend to be high.

Economic Decisions in Capitalism

1 What and How much to Produce

In capitalism, an entrepreneur will only produce goods and services for which there is a
demand from consumers so as to enjoy higher profits. Production depends on the goods
demanded by the consumer. For example, mobile phones have been in high demand in the
country for the last few years. Many producers have allocated their resources to respond to
this demand and to produce various kinds of mobile phones

2 How to produce

Firms can produce any product or provide any service using more than one method. The
method depends on the relative price of the resources involved. As resources become scare
relative to demand, prices will rise and discourage their usage. For example, a designer of
mobile phones has identified 2 methods of producing the product- by machinery, by hand or
by a combination of labour and machinery, Only the cheapest method of production and the
most efficient techniques will be adopted in the production of the phone.

3 For whom to produce

The third economic decision as to who will be receiving goods and services in the capitalism
system is answered through the price system. Goods and services are obtained by anyone
who can afford them. Goods and services are distributed among the residents of the country.
For example mobile phones are purchased by consumers who are willing to buy them at that
selling price.

Socialism is an economic system where all the economic decisions are made by the
government or a central authority. There will be no private property rights, since the
government officially owns all resources.

Characteristics Description of characteristics
Public ownership of All the resources are owned by the state of the government in the
resources interest of society as a whole. This is to ensure equal opportunity of
all citizens regardless of their income. Public ownership also aims to
fully utilize the countrys resources.
Central planning The central authority is responsible for making economic decisions
authority for society. The authority plans and allocates resources between
current consumption and investment for the future.
Price mechanism of Socialism gives less importance to market forces. Prices are fixed
lesser importance by the government and not determined by demand and supply.
Private profits are not allowed and public interest is emphasized in
the common economy.
Central control and A socialist economy is a fully planned economy where the
ownership government intervenes in all aspects of economic activities. The
government controls production, consumption, and the distribution
of goods and services.

Advantages of socialism Disadvantages of socialism

Greater Efficiency
Lack of incentives and initiative by
Economic efficiency under socialism is
greater than under capitalism, the means
Individuals have no profit motivate. This will
of production are not left in the market
lead to economic inefficiency since jobs are
forces rather they are controlled and
provided by the government and individuals
regulated by the central planning
are not motivated to work harder
authority towards chosen end. The central
planning authority makes an exhaustive
survey of resources and utilizes them in the
most efficient manner.

Greater Welfare Loss economic freedom and consumer

In a social economy, there is less inequality sovereignty
of income as compared to capitalist Under a socialist economy, the central
economy because of the absence of private planning authority or the government directs
ownership of means of production. In all economic activity. There is no choice
socialist economic system every one works given to the consumer and they accept
hard and paid as per his skills & ability.. whatever public enterprises produce.

Absence of monopolistic practices Absence of competition

One of the benefits of socialism is that it is Since there are limited private enterprises,
free from monopolistic practices to be found less research and development (R&D)
in a capitalist society. Since under socialism activities are carried out. This results in low
all means of production are owned by the quality products since there is no
state, the exploitations by the monopolist are competition.
absent. Instead of private monopoly, there is
state monopoly over the productive system
but this is operated for the welfare of the
Absence of business fluctuations Non-existence of economic and political
A socialist economy is also superior to a
capitalist economy that is free from business
Freedom of enterprise, freedom in choice of
fluctuation. Generally planned economy co-
occupation and many other essential

ordinates the action of various producing freedoms for an economy to prosper are out
units, prevents discrimination between rooted from society. The true spirit of
saving and investment and make full use of democracy dies away. The basic needs
available resources. It is able to control over Although it has been agreed that the six
production and avoid general deflationary basic needs in life are met within a socialist
trend. economy but all this is obtained at the
expense of economic and political freedom.


1 What and How much to Produce

In socialism, planning authorities decide what to produce. The Central Planning Authority will
collect detailed statistics on the resource availability in the country and link it with national
priorities. If the planning authority feels that the nation needs more computers for current and
future consumption, more resources will be allocated for the production of computers over
other products.

2 How to produce

The Central Planning Authority also decides on the techniques to be used in the production
of different goods and services. The choice is between traditional and modern techniques of
production. For example, the planning authority has a choice of producing computers using
more labour or more machinery.

3 For whom to produce

The distribution of the national product is decided by The Central Planning Authority. The
distribution of various commodities among citizens is done through a set of administered
fixed processes. Necessity goods are fixed at lower prices, and luxury goods at higher prices.
The purpose of these fixed prices is to reduce inequalities in the distribution of income.

This is an economic system which combines both capitalism and socialism to solve basic
economic problem. A mixed economy is an economy in which both the public and private
sectors play a role. In the real world, most countries practise a mixed economy.


Characteristics Description of characteristics
Public and private ownership The private and public sectors play important roles in a
of resources mixed economy. Private enterprises conduct business
freely and the encourages the private sector by providing
them with infrastructure and facilities.
Price mechanism and The price mechanism is used to price both goods and
economic plants in making services. Most of the mixed economies accept economic
economic decisions planning as an instrument of economic growth and social
Government helps to control In most mixed economies, the government controls income
income disparity disparity through income taxes and welfare payments. The
government also has direct control over profits, wages and
rents. Thus, the government helps to narrow th e income
gap between the rich and the poor.
Government intervention in the The government will not intervene in the economy except
economy for particular industries. In a mixed economy, the
government uses legislation for unsafe goods categorized
as illegal products such as military items.
Co-operation between the In mixed economies, there is significant co-operation
government, public and between the public and private sectors leading to economic
business sectors development

Advantages and disadvantages of mixed company

Advantages Disadvantages
There is variety of goods and services One of the biggest issues is the government
produced by the private sector and the gaining too much power in finding a balance
government provides public goods at between wealth equality, market freedom
affordable prices and individual freedom. This excessive
control over business activities can
discourage investment
Economic activities are more stable and A mixed economy also allows excessive
organized and negative externalities such as intervention of the government, especially
air, environmental and noise pollution as well that which is influenced by short-term
as industry waste, are curbed when the political factors, which may bring about
government controls the existence of inefficient outcomes
The social cost is minimized as the In a mixed economy, the government may
government regulates laws to ensure the limit company sizes to reduce monopoly
production method used by producers power. Hence, entrepreneurial spirit may be
causes the least harm to the environment. destroyed.


1 What and How much to Produce

In a mixed economies, the question of what to produce is decided by both the public and
private sectors. The goods produced and the services provided depend on the consideration
of social welfare and economic growth.

2 How to produce

The public and private sectors will decide on the techniques of production to be used in th e
production of the different goods and services.

3 For whom to produce

The distribution of goods and services is also decided by the public by the public and private
sectors. The price mechanism does not fully function in mixed economies. In many mixed
economies, the government intervenes directly through price controls and indirect through
the imposition of indirect taxes and subsidies.

An Islamic economy is another type of economic system in which the questions of what, how
and for whom to produce are decided for by public and private sectors according to Islamic
principles. The characteristics of an Islamic economic system are in the range of capitalism
and socialism, or in other words, similar to a mixed economy. Some Muslim countries
practise the economic system.


Characteristics Description of characteristics
Private and public In Islam, properties are owned by God and human beings are
ownership by God considered the trustees of the properties. Humans have the
right to enjoy and use these properties, but not as absolute
owners. However, the concept of public property in Islam
means that God created all wealth for all humans to have equal
Distribution of wealth In Islam, unlike capitalism and socialism, the distribution of
goods is based on the needs of consumers, not wealth
Prohibition of interest Interest (riba) earned from investment(s) is prohibited in Islam.
(riba) Therefore, banking, finance and businesses in Muslim countries
have reorganized and set up Islamic institutions which apply the
principles of Syariah that prohibits riba
Freedom of economic In Islam, man has the freedom of work and enterprise. They are
enterprise encouraged to choose any enterprise, such as agriculture,
business or trade, but need to meet the ends of economic

It is the duty of the state that it should enforce the laws of shariah in the country and taken
care of economic activity and justice in daily life, so that the citizens can lead their lives with
peace and financial stability.

It is the duty of the Islamic state that it should provide equal chances of employment and
economic development to all the people irrespective of color and caste.

All the citizens, rich or poor should be equal before the eyes of law. Courts should work
honestly to provide justice to the people.

It is the duty of the state to make full utilization of economic resources for the economic
welfare of the people.
Stability in the Price Level: The state is responsible to maintain stable prices in the country.
In this regard a government can frame a fiscal and monetary policy.

In Islamic state everybody is allowed to adopt any profession or business within the law and
it is the duty of the state that it should give them full protection.

Islamic economics advocate developing good relations with Muslim world in particular and
other in general. It should always cooperate with those who are right and serving for

The revenue and expenditure of the Islamic state is through baitulmal which is just like
central bank of the country. The items of revenue and expenditure of baitulmal are fixed in

In replacement of Tax system Islam gives The concept of Zakat. An Islamic State can collect
the zakat from the citizens. It can also impose tax and borrow the money form inside and
outside the country.


It is also the duty of Islamic state that it should enforce the fair distribution or wealth. Islam is
against the concentration of wealth in few hands.


Islamic economic system based on the moral values and implementation is

difficult. Calculation and Collection of Zakar and Usar cannt be verified and payers
calculation is deemed to be true. Escape of the responsibility of Zakat and UShars is easy.

Other economic systems in the world are interest based, around which whole economic
system is revolving. This is totally absent and forbidden in Islamic economic system and to
collaboration with other system is not possible and also it is difficult to implement it on non-
Muslim societies.

1 What and How much to Produce

All economic decisions are determined by the principles of Shariah which are laid out in the
quran and Sunnah. There is the production of permissible (halal) goods and services, while
non-permissible (haram) goods and services are not to be produced. The types of goods to
be produced based on the classifications of goods in Islam include basic goods
(Dharuriyyah), which should be produced first, followed by other types of goods and services.

2 How to Produce

The techniques used depends on the least costly method. The concept or philosophy of the
Islamic economic system, such as the concept of Tauhid, Rubbubiyyah, Tazkiyyah, Khalifah
and Ukhuwah, should be applied in economic decision making

3 For Whom to Produce

The rights of the poor is served first by producing basic goods at cheaper prices and, at the
same time, the rights of the rich is not left out. This is to ensure fair distribution of income
and wealth between the rich and the poor.

1. Principles of Economics (3RD EDITION), Deviga Vengedasalam, Karunagaran
Madhavan, OXFORD FAJR, published 2007.