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Summary Varsity College BCOM Year 1 Economics Chapter 2
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PMIC – Economics Ch 2Ch 2 – Economic Systems
2.1 Different Economic Systems
3 central economic questions:
1. What goods and services should be produced and in what quantities?
2. How should each of the goods and services be produced?
3. For whom are the various goods and services produced?
The 3 main types of economic systems are the further defined and described: the traditional system,
the command system and the market system. Their key features, advantages and disadvantages are
discussed and the mixed economic system is also defined. Finally three important economists whose
ideas helped to shape the different systems are introduced.
A system is a network of parts which interlock to from an overall pattern.
An economic system is a pattern of organisation which is aimed at solving the questions above. They
do not always work well, but they are often vast and complicated that it is marvellous they work at all.
2.2 The Traditional System
This is the oldest economic system. By this we mean that the same goods are produced and distributed
in the same way by each successive generation.
A traditional economic system provides clear and easy answers to the three central questions. It is a
rigid system, which is slow to adapt to changing conditions and stubbornly resists innovation. There
usually tend to be subsistence economies, but this is usually not considered a drawback by the
participants themselves.
In traditional systems, economic activity is not the first priority. It is usually the second to religious and
cultural values and the desire to perpetuate the status quo.
This system is not common nowadays, they tend to be limited to isolated and largely self-sufficient
communities.
Traditional farming methods are used, and production in such a traditional economy will mainly be
based in the agricultural sector and aimed at producing enough for survival.
In tradition system, economic activities are not considered to be the first priority
Characteristics of traditional economy
- Traditional economic system centres around a family or tribe. They use traditions gained from
the elders' experiences to guide day-to-day life and economic decisions.
- a traditional economy exists in a hunter-gather environment.
- Traditional economies produce only what they need. There is rarely surplus or leftovers. That
makes it unnecessary to trade or create money.
- Traditional economies rely on barter instead of money. It can only occur between groups that do
not compete with each other. For example, a tribe that relies on hunting exchanges food with a
group that relies on fishing. Because they just trade meat for fish, there is no need for a
cumbersome currency.
, PMIC – Economics Ch 2
2.3 The Command System
Is a system in which participants are instructed of what to produce and how to produce by the
central authority which also determines how the output is distributed. Command system is also
called a centralised planned system because the economy is governed and coordinated by the central
authority (the government).
The government determines which consumer goods should be produced, how to produce them, and
how they are to be divided among consumers. Further, the government determines how many
resources should be allocated to production and capital goods, how many resources for consumer
goods, and what types of capital goods should be produced. These are the problems central authorities
have to solve in a command system.
Command economies are often described as socialist or communist systems, although central planning
has been used mostly in socialist or communist systems, central planning is not necessarily
synonymous with socialism or communism. Central planning refers to the way in which the economic
activity planning refers to the way in which economic activity is coordinated, while socialism refers to
the ownership of the factors of production.
Command economic system is also described as social system, which is a system that is characterized
by public ownership of factors of production. Decision making is decentralized and coordinated by
market mechanism.
In a complex command economy, the answers to the economic problems of production and distribution
are provided by a central authority comprising the typical decisions that have to be taken in such
situations.
Characteristics of a Command Economy
1. The government creates a central economic plan. The five-year plan sets economic and
societal goals for every sector and region of the country. Shorter-term plans convert the goals
into actionable objectives.
2. The government allocates all resources according to the central plan. It tries to use the
nation's capital, labour, and natural resources in the most efficient way possible. It promises to
use each person's skills and abilities to their highest capacity. It seeks to eliminate
unemployment.
3. The central plan sets the priorities for the production of all goods and services. That
includes quotas and price controls. Its goal is to supply enough food, housing, and other basics
to meet the needs of everyone in the country. It also sets national priorities. These include
mobilizing for war or generating robust economic growth
4. The government owns monopoly businesses. These are in industries deemed essential to the goals of
the economy. This includes finance, utilities and automotive. There is no domestic competition
in these sectors. Eskom
5. The government creates laws, regulations, and directives to enforce the central plan. Businesses follow the
plan’s production and hiring targets. They can’t respond on their own to free-market forces.
They cannot increase prices or hire random people.
2.4 The Market System
A market is any contact or communication between potential buyers and potential sellers of a good or
service.
For a market to exist, the following conditions have to be met:
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