Economic System

Economics - Economicsis thesocial sciencethat

analyzes theproduction, distribution

andconsumption ofgoods & services.
Economic Systemis the system of production,

distribution and consumption

The economic system is composed of people,

institutions and their relationships. It addresses the

problems of economics like the allocation of the
resources.

Aneconomic systemis the combination of the various agencies, entiti

that provide the economic structure that guides the social community.

Economic System: Anorganizedway in which a

state ornation allocates its

resourcesanddistributes goodsandservicesin the
nationalcommunity.

Types:
Capitalism (Market Economy)
Socialism (Planned economy)
Mixed (Capitalism + Socialism)

 Capitalism is an economic system in which the

means of production are privately owned and

operated for profit, usually in competitive
markets.
In other words; An economic system in which

investment in and ownership of the means of

production, distribution, and exchange of wealth is
made and maintained chiefly by private
individuals or corporations.

 ADAM SMITH called the

obvious and simple system of

natural liberty (Book: Wealth
of Nations).
Subject to certain restrictions,
individuals (alone or with others) are
free to decide where to invest, what
to produce or sell, and what prices
to charge. There is no natural limit to
the range of their efforts in terms of
assets, sales, and profits; or the
number of customers, employees,
and investors; or whether they
operate in local, regional, national,
or international markets.

Capitalist System
(Adam Smith)

Mercantile
System

Centralized to Decentralized
system
Authoritarianism to
representative democracy

Production Factors
in Government
hands

Free flow of resources

Export emphasis

Beneficial for society

People strive for self interest in

free market

Based on Demand & Supply

Forces
Monopoly to Competitiveness
Self sufficiency to International
interdependence
Producer interest to customer
power

Benefits of Capitalism
In years 10001820 world
economy grew six-fold,in years
18201998 world economy grew
50-fold
Provides Choice to customers
Provides valuable goods and
services
Capitalism actively rewards
positive traits like hard work
Similarly, it punishes negative
traits such as laziness and theft
Narrows the gap between
common person and wealthy
Provides opportunity to realize
dreams and desires
Capitalist societies usually do not
have largeblack markets
Build on democracy
Social Good

Major limitations/ Criticism:

Downfall of work ethics
Free Market + Self Interest
Accumulation of wealth
Encourages inequality in a
society
Business lobbying with
government
Monopolistic tendency
Human resource exploitation
Results in great disparities
between income of people
owning the capital resources
and others

socialism
Collective ownership and democratic control of the
material means of production by the workers and the
people
Socialism is a term applied to an economic system in which

property is held in common and not individually, and

relationships are governed by a political hierarchy. Common
ownership doesn't mean decisions are made collectively,
however. Instead, individuals in positions of authority make
decisions in the name of the collective group.
A primary goal of socialism issocial equalityand

adistribution of Wealth based onones contribution to

society and an economic arrangement that would serve the
interests of society as a whole.

 Socialism as we know it today, most commonly refers to

"market socialism," which involves individual market

exchanges organized by collective planning.
Difference between socialism and communism is that

communists directly oppose the concept of capitalism, an

economic system in which production is controlled by private
interests. Socialists, on the other hand, believe socialism can
exist within a capitalist society.

Features of Socialism;
Social Ownership of means of production
Existance of public sector
Decisive role of Economic Planning
Production guided by Social Benefits
Abolition of exploitation of labour

Benefits of Socialism
Better salaries
ii. Stable Environment
iii. Eliminates poverty
iv. Better Products
v. Fulfills survival need
vi. Opportunity for citizens to explore noneconomically-productive pursuits
i.

Criticism of Socialism
Distorted price signals
Suppression of economic democracy
Slow Technological advancements
Minimize self management
Reduced incentives

COMPARISON

COMPARISON..

BASIS OF
DIFFERENCE

CAPITALIST ECONOMY

SOCIALIST ECONOMY

Resources
Ownership

Privately owned

State owned

Foundation belief

competition brings out the

best in people

cooperation is the best

way for people to
coexist

Earning of wealth

everyone works for his own

wealth

everyone works for

wealth which is
distributed equally to
everyone

Market Scenario

Level playing field

Protection to PSUs,
Private enterprises are
permitted in few
businesses only

Govt. interference

Only in situations where laws Fully involved

have been broken

Employees
motivation

Highly motivated on account

of proportional benefits

Rarely motivated as
performance is not
rewarded

Merit

Perception of better
economic growth because of

Equal distribution of
income results in

Mixed Economy
Any economy in which private corporate

enterprises and public sector enterprises exist

side-by-side, and decisions taken through market
mechanism are supplemented by some form of
partial planning, is to be described as a mixed
economy.
This system overcomes the disadvantages of

both the market and planned economic systems.

Provides a clear demarcation of the boundaries of

public sector and private sector so that the core

sector and strategic sectors are invariably in the
public sector.
The government intervenes to prevent undue

concentration of economic power, and

monopolistic and restrictive trade practices
The rights of the individual are respected and

protected subject only to the requirements of

public law and order and morality

Features

Resources are owned both by the government as

well as private individuals. i.e. co-existence of both
public sector and private sector.

Market forces prevail but are closely monitored by

the government.

Monopoliesmay be existing butunder close

supervisionof the government.

Advantages

Producers and consumer have sovereigntyto

choose what to produce and what to consume but
production and consumption of harmful goods and
services may be stopped by the government.

As compared to Market economy, a mixed

economymay have less income inequalitydue to
the role played by the government.

A mixed economy represents an achievable balance

between individual initiative and social goals.

Thank you