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Economic Systems

Market Economies

The market economy (private enterprise system) is centered on the


economic philosophy of capitalism and competition.

Capitalism is an economic system in which businesses are rewarded for


meeting the demands of consumers. It allows for private ownership of all
businesses. Entrepreneurs, desiring to earn a profit, create businesses that
they believe will serve the needs of the consumers.

Economic decisions and the pricing of goods and services are guided solely
by the interactions of a country’s individual citizens and businesses. There
is little government intervention or central planning.

There are four different types of competition in a market economy:

 Pure competition is a market or industry in which there are many


competitors. It is easy to enter the market, as there are few barriers
to entry and many people/firms are able to offer products that are
similar to each other. Individual firms have very little control over the
price.
 Monopolistic competition means that there are fewer competitors,
but there is still competition. In this market environment, it is
somewhat difficult to enter the market. Due to the differentiation
factor, individual firms are able to have some sort of control over the
prices.
 Oligopoly is a market situation with few competitors. The few
competitors exist due to high barriers to entry. The products or
services in this market may be similar (telephone companies) or they
may be different (supermarkets). Here, firms do have some control
over prices.
 Monopoly exists in the private enterprise system when there is
absolutely no other competition. That means that there is only one
provider that exists to provide a good or service. In this case, it is
often the government that regulates who can enter the market (e.g.
public transportation).

A market economy has several advantages: Firstly, competition leads to


efficiency because businesses that have fewer costs are more competitive.
Secondly, innovation is encouraged because it provides a competitive edge
and increases the chance for wealth. Thirdly, a large variety of goods and
services are available as businesses try to differentiate themselves in the
market.

However, market economies have also disadvantages: Firstly, disparity in


wealth exists because wealth tends to generate wealth. It is easier for
wealthy individuals to become wealthier than it is for the poor to become
wealthy. Secondly, there tends to be a reduced social safety net, because
social programs are mostly funded by the government.

Planned Economies

In addition to the private enterprise system, planned economies are


another market structure in the world economy. In a planned
economy, government controls determine business ownership, profits, and
resource allocation. Countries that existed with planned
economies, however, have not been highly successful. The most common
theory of a planned economy is communism, which purports that all
property is shared equally by the people under the direction of a strong
central government.

It is an economic system that involves public ownership of businesses.


Rather than entrepreneurs, the government decides what products
consumers will be offered and in what quantities.
Communism was proposed by Karl Marx and developed and
implemented by V. I. Lenin. In Marxist theory, “communism” denotes the
final stage of human historical development in which the people rule both
politically and economically. The communist philosophy is based on each
individual contributing to the nation’s overall economic success and the
country’s resources are distributed according to each person’s needs. The
central government owns the means of production and everyone works
for state-owned enterprises.

A planned economy has some advantages: Since government has control


over all factors of production the chances of monopoly happening are next
to nil under planned economy. Also, it may help in reducing the gap between
poor and rich because all government policies are designed to bring social
equality.

However, the planned economy has some big disadvantages: Firstly, it


leads to destruction of entrepreneurs and innovators which in turn leads to
lower productivity and also lower growth for a country. Secondly, this system
leads to dissent among the citizens as the basic right of human being which
free will is challenged under this system. Finally, this system suffers from
government bureaucracy, delay in decision making on the part of
government officials bottlenecks in production and inefficient use of
resources.

Mixed Economies

History has proven that, worldwide, the central command-economy model


has not sustained economic growth and was not able to provide long-term
economic security for its citizens.

The majority of economies that we see today, however, are mixed


economies. These are economic systems that display characteristics of
both planned and market economies.

In the mixed economy, government-owned firms frequently


operate alongside private enterprises. Good examples of this can be found
in Europe where the respective governments have traditionally controlled
certain key industries such as railroads, banking, and telecommunications.

Strictly speaking, all modern economies are mixed, though there are wide
variations in the amount of mix and the balance between public and private
influence.

Today, the majority of economies are mixed economies.