What Is An Economic System? ‘The set of techniques and standards by which

a civilization decides, as well as organizes the distribution of inadequate economic resources to please infinite human wants.’

‘Economic system‘ also refers to organizational arrangements and procedures through which a culture makes its manufacturing and consumption decisions.

COMMAND ECONOMY The command economy is an economic

system that is controlled by a centralized federal government.

In most examples of a command economy, the focus of the control is on the industrial goods that are manufactured with the country.

Sometimes referred to as a centrally planned economy, it is not unusual for the government to own and operate the production facilities producing the goods, or to maintain a high level of control over companies that are allowed to operate within the country.

ADVANTAGES OF COMMAND ECONOMY

The government will ensure a more equal distribution of income and wealth

Essential goods/services will be provided to the community. For example education.

The government can determine which goods are produced. It has the power of decision making. 

It provides a minimum standard of living for all citizens. 

DISADVANTAGES OF COMMAND ECONOMY

There is little consumer choice. Since everything is allocated according to a planning process, consumers will have little say in what is provided directly by the state. 

Little variety of goods and services. Loss of individual freedom. Leads to allocative and productive inefficiency due

to a lack of  competition and no profit motive.    Subsidies on essential goods and services quickly

lead to shortages. Therefore queuing is common in command economies.

TYPES OF COMMAND ECONOMY

CHARACTERISTIC OF COMMAND ECONOMY

• The government or other central authority makes decisions and determines how resources will be used.

• There is no competition.• Businesses are not run to make a profit.• Consumers have few choices in the

market place.• Factories are concerned with quotas.• Shortages are common because of poorly

run factories and farms.• The government sets the prices of

goods and services

Examples of command economies

Laissez Faire Economy      A laissez faire economy or free market

economy is a system where prices are determined by supply and demand, with little or no government control. Thus, this form of a market runs on its own accord with prices and quantities of transactions being determined solely by supply and demand.

Advantages of laissez faire economy

• The competition would force domestic producers to become more efficient, helping the country in the long run.

• Individuals are forced to become more productive or make better decisions in order to do well financially.

• Help domestic producers import components more cheaply, thus helping them produce cheaper goods.

Disadvantages of laissez faire• Free market economy curbs this very

entrepreneurial spirit by giving rise to monopolies, thus creating barriers to entry in the market.

• A minimal level of government regulation finds itself in market failure more often than other market economies.

• Monopolies can set the prices of products artificially high, provide poor services and low quality of goods, exploiting consumers in the process.

CHARACTERISTICS OF LAISSEZ FAIRE ECONOMY

• Resources are owned and controlled by individuals.

• Economic decisions are made by individuals competing to earn profits.

• Individual freedom is considered very important.

• Economic decisions are made by the basic principles of supply and demand.

• Profit is the motive for increasing work rather than quotas.

Examples of laissez faire economies