National Institute of Business Management

Chennai - 020
FIRST SEMESTER EMBA/ MBA
Subject: Principles of Economics
Q3. Describe the kinds of Economic Systems.
The Four main kinds of Economic Systems are:-
1. Traditional (subsistence) Systems,
2. Market or Commercial Systems
3. Centrally Planned Systems, and
4. Mixed Economic Systems
1) Subsistence Economic Systems: An economic system under which people
produce just enough goods to feed their households with very little left for sale or
for exchange in the market.
Characteristics of Subsistence Economic Systems:
a) Production is geared towards subsistence (the family) and basic survival.
b) Trade is mainly by a barter system (direct exchange of goods and services).
c) Market and money are of little importance
d) Custom and traditions are major influences on what is produced and how
products are allocated.
2) Market (Capitalist) Economic Systems: Under capitalist economic systems,
decisions about what, how, and where to produce a particular good are
determined by market conditions such as supply, demand and price.
Characteristics:
a) Production is large-scale and geared toward markets
b) The market (price) determines allocation and use of societys resources
c) The price mechanism determines supply and demand of goods and services
d) Competition among producers works to ensure stable and lower prices for
consumers
Drawbacks of the Market System:
a) Since market does not exist for some resources, only some environmental
resources might be used and exchanged in the society.
b) The long cycle of production of some crops (e.g. timber and tree crops) does
not allow for rapid adjustment of demand and supply so gluts and shortages often
follow in succession.
c) Market forces do not relieve resource problems when price decreases spur on
demand but shortages of the commodity fail to stimulate immediate increase in
supply.
d) Strong demand and high prices may encourage supply to the point that a
resource would be depleted beyond its critical limit.
e) Externalities or environmental side effects (i.e. air and water pollution) result
from market operations.
3) Socialist or Centrally Planned Systems: Under centrally planned economies,
decisions regarding what commodity to produce, how and where to produce and
how to distribute the products are made by government rather than the market.
Characteristics:
a) Central government takes over decisions about production and marketing of
goods.
b) Price controls keep prices low but discourage production
c) Attempts are made to allocate goods and services according to the needs of
individuals?
d) Private ownership of resources is restricted
e) The role of the market in determining prices, allocation of goods etc. is limited
Drawbacks of Socialist Economic Systems
a) Government control creates little incentive to work hard or produce goods and
services
b) Serious resource problems including severe hunger and famine are rampant
c) There can be extensive environmental damage
4) Mixed Economic Systems: Mixed economic systems combine elements of
market and command economies. It is currently the most common economic
system.
Characteristics: Most mixed systems are capitalist in character but are generally a
mixture of market and centrally planned economies. Governments often
intervene to modify the market economy (prevent monopolies, influence prices,
and offer incentives to increase production).
Intervention in resource management by the Government
1. The state as an arbiter, adjudicates between different claims, pressures,
concerns and needs arising within society.
2. The state and capitalism are inextricably linked for the state promotes the
interests of capitalism
Reasons for Government Intervention
a) There are no markets for public goods (e.g. clean air and water, scenery and
wildlife). These amenity resources are often wasted.
b) Externalities are passed on to others and society as a whole.
c) The market may encourage over-exploitation of resources owned by
individuals and companies beyond critical limits.
d) The desire to promote social justice and equity in a country by providing
sufficient access to resources.
e) To protect groups (e.g. farmers) whose production are essential but may not be
able to compete and survive the market when left alone.
f) Considerations for national security (e.g. food production under war
conditions).