Economic Systems (AS Revision)

An economic system is the way in which production is organised in a country or group of countries. This includes what goods and services are produced, how theses goods and services are produced and who these goods and services should be received by. The three main economic systems that will be covered in this post are market economies, command economies and mixed economies.

The Market Economy

A market economy is defined as "an economic system whereby resources are allocated through the market forces of supply and demand". In a market economy the consumer is sovereign; the demand by consumers controls the output of produces and therefore the allocation of resources. This takes place through the price mechanism where firms respond to consumer choice through the free movement of price in response to demand and supply. The government will have little involvement in this process, with their main roles involving legislation and the protection of property rights. The USA may be considered the closest to a free market, however governments still play roles in providing some public services.

In a market economy the level of consumer choice will be dependent upon their income. The higher the income of the consumer, the greater their choice. This could lead to social inequality by excluding those on low incomes from various goods and services. However, a free market economy may be seen as beneficial to the consumer a competition between producers will be high. This will encourage allocative and productive efficiency in order to be price competitive as well as encouraging research and development by firms to compete on non-price factors such as quality. 

Command/ Centrally Planned Economies

A command economy is "an economic system where government, through a planning process, allocates resources in society". Examples of command economies include North Korea and Cuba. It is the governments that own the majority of resources and it is their role to allocate these resources. Both wages and prices of essential items are controlled by the state. Governments of command economy's set targets for production in long term plans that often aim for a high rate of growth in output.

Arguments against command economies include a lack of consumer choice. Not only are consumers exposed to a lack of variety of goods and services, but as workers they are also allocated jobs by the state.With equal choice and opportunity, workers have little incentive to improve. The lack of competition between producers removes the incentive to achieve economic efficiency, and also likely to result in a lower quality of goods and services that are provided.

The Mixed Economy

A mixed economy is defined as "an economic system in which resources are allocated though a mixture of the free market and direct public sector involvement". The UK is an example of a mixed economy, where a Private Sector and Public Sector exists. The private sector allocates resources through the market forces of supply and demand, but with government intervention in markets that would fail if left to the free market. The government allocates resources in the Public Sector, which includes services such as education, healthcare and the emergency services. 

If governments intervene effectively and to the correct extent, a mixed economy may considered to be the best of both worlds. However in some cases, government intervention in markets is unable to correct the existing the market failure and may even make the situation worse resulting in government failure.