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The function of an economy is to resolve the basic economic problem (resources are scarce, but wants

are infinite). Therefore, resources need to be allocated, in three steps:

1. What is to be produced?

2. How is it to be produced?

3. For whom it is to be produced?

Economic system a complex network of individuals, organisations and institutions and their socialand legal interrelationships.

Economic system Command Economy Mixed economy Market economy

Main actors Government - (the

planners), consumers,

workers

Consumers, producers,

factor owners,

government

Consumers, producers,

owners of private

property, government

Motivation All actors are assumedto be selfless,

cooperating to work for

the common good

Private sector -consumers, producers

& factor owners -self-

interest;

Public sector -

government - good of

the community

Private sector -consumers, producers

& property owners -

self-interest, profit

maximisation;

Public sector

-government - social

welfare maximisation

Ownership Public ownership all

factors of production

(apart from labour) are

owned by the state

Partly owned by

private individuals and

organisations,

government owns a

significant proportion

Private ownership

Resource allocation Planning process

state directs what, how,

for whom and by

whom to produce

centralised decision

making

Through competition.

Government regulates

economic activities &

provides merit goods.

Competition exists and

individuals are free to

allocate their resources

as they wish

decentralised decision

making

Environment The state has all the

power to decrease thedamage done, but it has

been neglected

severely

The damage done is

held at reasonablelevels by laws

Individuals lack the

incentive not todamage the

environment, laws have

to regulate the situation

Command / Planned economy an economic system where government through a planning process

allocates resources in the society.

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Much of the thinking that underlay the creation of centrally planned economies came from the pen of

Karl Marx. His greatest work, Das Kapital, was published in 1867. He showed how capitalism created

a social structure that left many people poor and oppressed. He argued that the working classes would

eventually overthrow the capitalist system and replace it with collective forms of ownership by the

people, for the people. Only then would ordinary people benefit fully from their labours. Marxism was

extremely influential, and was the basis for foundation of communist parties worldwide. And although

command economy is mostly associated with communism, it is not always the case. Many third world

countries have issued 5 year plans. British economy in the Second World War was run very much like a

planned economy.

Allocating resources through a planning process is a complex operation. Planners have to decide what to

produce (how many pairs of shoes, how much alcohol...). Then they decide how it is to be made

(techniques & factors of production choice). Finally, decisions about redistribution have to be made

about who will receive what goods and services.

Planning and forecasting is notoriously difficult. In practice it may be so difficult, that some choices

may be left to individuals. In most command economies nowadays, workers receive wages. They are

free to choose within limits how to spend their money. Some goods are provided for free (education),

some are allocated, but have to be paid for (housing), and some are available for purchase (food,

clothes).

Planners may decide to limit prices so that particular goods are within the range of all consumers. If the

prices are set too low, excess demand is created, which leads to insufficient amount of goods in shops

(or it may be the case that we begin with an insufficient amount of goods, no matter what the prices

were). So when the good becomes available, queues form. Only those in the front of the queue will be

able to obtain the good.

Coupon rationing system can be introduced as well, where individuals are given the chance to get a good

according to family size, jobs, working hours, etc. This decreases the choice to zero.

Advantages:

1. Full employment

2. Stability a planned economy does not suffer from a business cycle even if it does not respond to

customer demand. Under an ideally administered planned economy, the development would show in

stable manner.

3. Addressing collective objectives in theory, everyone should unselfishly contribute to the

improvement of standards on the whole. As individual profit is eliminated, it is up to the planners to

decide what is the appropriate amount and price for each good.

Disadvantages:

1. Shortage of goods, limited range of goodcritics of planned economies argue that planners are not

able to detect consumer preferences, shortages, and surpluses with sufficient accuracy which results in

an inefficient co-ordination of production. For example, during certain periods in the history of the

Soviet Union, shortages were so common that people had to wait hours in a queue to buy basic

consumer products such as shoes or bread. These shortages were partly caused by the central planners

who decided, for example, that producing machinery was more important at that time, or because the

commands were not given to supply the shoe factory with the right amount of leather, or because the

planners did not give the shoe factories the stimulus to produce the required quantity of shoes of the

required quality.

2. Goods of poor quality the important thing is to produce planned number of goods, regardless theirquality.

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3. Lack of incentive for innovation in planned economy, the important thing is to meet production

targets. Trying out new technology is risky. If anything goes wrong, the target will not be met, therefore,

sticking to the tried and tested method is safer.

4. Overall productivity because the wages are fixed, workers are not motivated to work harder. What

they will do is work as little as possible without being disciplined. Plus, as there is zero unemployment

rate, people do not need to worry about losing their current job, as they will be given another one.

5. Limiting personal freedom in command economies state intervenes highly in people's personal lives.The choices are limited, goods are allocated, and the social objectives are not to be decided according to

peoples own desires. Citizens cannot, for example, move to another location without state permission

because they would not be able to acquire food or housing in the new location, as the necessary

resources were not planned. Examples where planned economies limited individual freedom include

Soviet Russia, People's Republic of China.

6. Black market the system by which people illegally buy and sell goods that are difficult to obtain was

very common in centrally planned economies.

7. The advantaged, the disadvantaged those in power use the planning system to their own advantage.

Mixed economy an economy where both the free market mechanisms and the government planning

allocate a significant proportion of total resources.

The term "mixed economy" arose in the context of political debate in the United Kingdom in the postwar

period, although the set of policies later associated with the term had been advocated from at least the

1930s. Supporters of the mixed economy, includingR. H. Tawney, Anthony Crosland and Andrew

Shonfieldwere mostly associated with the British Labour Party, although similar views were expressed

by Conservatives includingHarold Macmillan. Critics of the British mixed economy, includingLudwig

von Mises, Michael Johnson andFriedrich von Hayek, argued that what is called a mixed economy is a

move toward socialism and increasing the influence of the state. The term mixed economy was coined by

Pat Mullins to describe economic systems which stray from the ideals of either the free market, or

various planned economies, and "mix" with elements of each other. There is not a consensus on which

economies are capitalist, socialist, or mixed.

The mixed economic system attempts to overcome the disadvantages of a market economic system by

using government intervention to control or regulate different markets. In the mixed economy, just as in

the market economy, people and firms in the private sector own scarce resources with the aim of making

as much money as possible. However, in mixed economies the government or public sector also owns

some scarce resources to produce goods and services that they think their country, and its people, need

and want.

Private sector- is made up of all the businesses and firms owned by ordinary members of the general

public. It also consists of all the private households in which people live.

Public sector- is owned and controlled by a government. It consists of government businesses and firms,

and goods and services provided by the government, such as the National Health Service, state education

(merit goods), roads, public parks and law and order. Government has a number of important functions.

One is to regulate the economic activities of the private sector of the economy. It needs for example to

ensure that competition exists and that property laws are upheld. Other one is to provide public and

merit goods to the community. The state may also choose to own key sectors of the economy, such as

the railways, postal service and electricity industries. Many of these will be natural monopolies.

http://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/R._H._Tawneyhttp://en.wikipedia.org/wiki/Anthony_Croslandhttp://en.wikipedia.org/w/index.php?title=Andrew_Shonfield&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Andrew_Shonfield&action=edit&redlink=1http://en.wikipedia.org/wiki/British_Labour_Partyhttp://en.wikipedia.org/wiki/Conservative_Party_(UK)http://en.wikipedia.org/wiki/Harold_Macmillanhttp://en.wikipedia.org/wiki/Ludwig_von_Miseshttp://en.wikipedia.org/wiki/Ludwig_von_Miseshttp://en.wikipedia.org/wiki/Michael_Johnsonhttp://en.wikipedia.org/wiki/Friedrich_von_Hayekhttp://en.wikipedia.org/w/index.php?title=Pat_Mullins&action=edit&redlink=1http://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Planned_economyhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/R._H._Tawneyhttp://en.wikipedia.org/wiki/Anthony_Croslandhttp://en.wikipedia.org/w/index.php?title=Andrew_Shonfield&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Andrew_Shonfield&action=edit&redlink=1http://en.wikipedia.org/wiki/British_Labour_Partyhttp://en.wikipedia.org/wiki/Conservative_Party_(UK)http://en.wikipedia.org/wiki/Harold_Macmillanhttp://en.wikipedia.org/wiki/Ludwig_von_Miseshttp://en.wikipedia.org/wiki/Ludwig_von_Miseshttp://en.wikipedia.org/wiki/Michael_Johnsonhttp://en.wikipedia.org/wiki/Friedrich_von_Hayekhttp://en.wikipedia.org/w/index.php?title=Pat_Mullins&action=edit&redlink=1http://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Planned_economy

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There is considerable controversy about the degree of mixing that should take place in a mixed

economy. In Sweden, over 60 percent of GDP is accounted for by public expenditure, compared to 33

percent in the free market economy of the USA. In Sweden there is much greater government spending

per capita than in the USA. This means that in Sweden compared to the USA all citizens have access to

medical care free at the point of consumption, there are generous state pensions, automatic retraining for

those made unemployed and free child care for all working mothers. However, there is a cost. Taxes in

Sweden are much higher than in the USA.

Advantages:

1. Takes the good from the command and the free market economy provides a wide range of goods at

reasonable prices due to competition, but it also prevents the consumption of harmful substances

because government has certain influence over the market.

Disadvantages:

1. Depend on the ratio of the mix if the state has too much power, corruption may occur. If it doesnt

have much power, certain individuals (handicapped people) may be disadvantaged.

Market economy an economic system which resolves the basic economic problem through the market

mechanism.

Support for the free market as an ordering principle of society is above all associated with liberalism,

especially during the 19th century. (In Europe, the term 'liberalism' retains its connotation as the

ideology of the free market, but in American and Canadian usage it came to be associated with

government intervention, and acquired apejorative meaning for supporters of the free market.) Later

ideological developments, such as minarchism, libertarianism and objectivism also support the free

market, and insist on its pure form. Although the Western world shares a generally similar form ofeconomy, usage in the United States and Canada is to refer to this as capitalism, while in Europe 'free

market' is the preferred neutral term. Modern liberalism (American and Canadian usage), and in

Europesocial democracy, seek only to mitigate the problems of an unrestrained free market, and accept

its existence as such.

In a market mechanism, resources are allocated through the spending of millions of different consumers

and producer. This is Adam Smiths invisible hand of the market. He argued that, although economic

factors pursued their own self interest, the result would be an allocation of resources in the economy

which would be in interests of the society as a whole.

In pure free market, the consumers decide what is to be produced. The key role in this mechanism

belongs to profits. Profits act as a sign of what is to be produced. If the profits are abnormal, consumerswish to buy more of a product, so the amount of goods is increased, and new firms may emerge, creating

competition.

All other things held equal, consumers will purchase from the producer who offers the lowest price.

How the goods are to be produced at the lowest costs, if the firm is to survive in the market. Market

results in productive efficiency.

Production process is consumer orientated; market prices will be set at the price where demand meets

supply (equilibrium point).

Government role is to provide public goods, to issue money and maintain its value, to ensure an

adequate legal framework (laws that enforce property rights, laws about contracts of purchase and

sale...), to break up monopolies & prevent practices which would restrict free trade, and ensure the

environment is not damaged. Otherwise, government should intervene as little as possible.

The basic incentive to work is the one to survive.

http://en.wikipedia.org/wiki/Liberalismhttp://en.wikipedia.org/wiki/Connotationhttp://en.wikipedia.org/wiki/Pejorativehttp://en.wikipedia.org/wiki/Minarchismhttp://en.wikipedia.org/wiki/Libertarianismhttp://en.wikipedia.org/wiki/Western_worldhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/New_liberalismhttp://en.wikipedia.org/wiki/Social_democracyhttp://en.wikipedia.org/wiki/Liberalismhttp://en.wikipedia.org/wiki/Connotationhttp://en.wikipedia.org/wiki/Pejorativehttp://en.wikipedia.org/wiki/Minarchismhttp://en.wikipedia.org/wiki/Libertarianismhttp://en.wikipedia.org/wiki/Western_worldhttp://en.wikipedia.org/wiki/Capitalismhttp://en.wikipedia.org/wiki/New_liberalismhttp://en.wikipedia.org/wiki/Social_democracy

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Advantages:

1. Quick response to peoples wants if people demand a product and can afford it, producers will find

it profitable to provide it, and relocate resources into the production of the particular good.

2. Wide variety of goods

3. Encourages innovation new methods and machines reduce costs and therefore increase profits.

4. Freedom of choice

Disadvantages:

1. Labour resources will be employed only if it is profitable to do so labour is just another factor of

production, disadvantaged people or ordinary workers may be unemployed throughout a recession.

2. Failure in providing certain goods and services public goods might not be provided as some people

would want to use them without paying.

3. May encourage the consumption of harmful good if there exists a demand for those goods, and it is

profitable for the suppliers to sell them, they will do so, unless there is a law to oppose any such action.

4. The social effects of production may be ignored companies are not encouraged to take care of the

environment by laws, and therefore they have just moral incentive to do so.

Comparison

Economic growth in theory, a country with relatively low GNP per head should have comparable

economic growth using either the planned, mixed or free economic system. However, experience shows

that planned economies have consistently failed to match the growth performance of free enterprise or

mixed economies. As economies grow, they become more complex. The more complex the economy,

the more difficult it is to plan the allocation of resources efficiently. Diseconomies of scale may beexperienced, because the management structures fail in the long run.

Risk the removal of risk (in command economies) leads to the removal of incentives to work and

create wealth, and there is no need to be innovative. In market or mixed system, the risk taken may be

reduced by insurance, and although it is decreased, the risk of trying new possibilities may lead to higher

profits, which is the reason it will always exist in those two mechanisms.

Availability one of the main problems of a market economy is that poorer people with little money are

unable to buy many of the goods and service that are available. Planning gives the government the

power to give goods and services, or more money, to people that it thinks needs them. For example, in

the UK, the government provides unemployment benefits and free health care for those who cannot

afford to pay.Planning It has been argued that underlying market economies is a complex network of command

economies. A firm is a small command economy. With a given number of inputs the firm has to allocate

those resources to produce a given quantity of outputs. Firms have to plan to use the resources in order

to answer the questions of what to produce, how to produce and for whom to produce (as state has to

decide in command system). Even the free markets have a significant element of planning.

Sources

ECONOMICS second edition Alain AndertonECONOMICS & BUSINESS Nuffield

ECONOMICS A Complete Course Moynihan, Titley

www.wikipedia.org