Advantages Of Various Types Of Economic Systems - Assignment Example

Advantages Of Various Types Of Economic Systems Contents Contents 1 Introduction 1 Analysis of the Statement 2 Conclusion 4 References 4 Introduction Economy seeks to find a solution to the basic problems of the economy. The resources that are available in an economy at a particular point of time are restricted. However, the human beings have unlimited wants. Thus it is clear that there exists a discrepancy between the demand for the various kinds of resources and the supply of these in an economy. The objective of economics is to allocate these resources in the most optimal manner and in doing so the intervention of the market mechanism is inevitable. The economic system decides the amount and the mechanism of the resource allocation. The factors of production, the organisations and the market forces comprise the economic system that interacts with each other with an aim to resolve the economic problems (Anderton, 2009, p. 30). This economic system is of various types depending on the impact of market forces into the system. A free economy is one in which the market forces are solely responsible for the determination of the price and quantity and the resources are allocated automatically without any kind of government intervention. On the other hand, in case of mixed economy, the market mechanism is allowed to operate but to a limited extent. In a mixed economy there is coexistence of the public and private enterprises in the economy. It has been argued by many scholars that the free market economy operates on a higher level of efficiency compared to the mixed economies. Analysis of the Statement In order to understand the level of efficiency of these two types of economy it is essential to analyse the characteristics of these economies. A free market economy is characterised by the private ownership of the means of production. The government’s role is limited to the regulatory and legal aspects of ensuring the rights of the people. The people who are existent in the economy have the right to operate in the market and buy and sell goods and services at the price and quantities that are determined by the market mechanism. The government may have regulation in form of quotas or tariffs that that does not hamper the freely market environment in such economies (Samuelson and ‎ Nordhaus, 2010, p. 31). The market structure that is existent in such economies is based on competitive framework. The decision making of the allocation of resources id decentralised because each individual and decide how much to buy or sell in the market depending on the efficiency level. The market mechanism works in a free market economy and thus the various aspects of the production is decided by individuals involved in the process. What product the market will produce is decided by the consumers. When the consumers have a certain need for a product they would demand more of that product and less of the other products. The producers would adjust their production process as per the needs of the consumers. When the consumers in a particular free market would demand a product, the price would go up (Black, 1995, p. 318). This is mainly because of the fact that the resources are limited. So the consumers who would pay a higher price to own that product. On the other hand when a product is not needed the producers would lower the price to attract the consumers to buy the product. The amount to be produced is decided by the producers. The producer who would offer the lowest price for a particular product would get the highest number of buyers (Tucker, 2010, p. 54). Therefore they would decide the price depending on the cost that they would incur. Most firms try to implement such a technique that would reduce this cost. Hence the firm would reach a level of productive efficiency. This is possible for a free market because the producers would always try to offer a lucrative price to the buyers. However, since the price would be market determined the resources would be allocated to only those who would pay a high price to the producers. Thus there would be a possibility that the resources would concentrate into the hands of the rich. The role of the government in a free market economy is limited to providing public goods like defence, roads which no individual would pay for. There is also a need for a strict legal framework to maintain law and order in the country. The government would also need to interfere in case of market failure situations. Thus in a free market economy there would be enough scope for the individuals to choose the resources. This would entail efficiency in the economic system. In a mixed economy which has characteristics of both free market economy and planned economy. The decision making power of allocation of resources is distributed between the government and the public enterprises. Thus the main aim of the private sector in such an economy would be to maximise the benefit of the owners, the producers and the consumers. On the other hand the objective of the government would be the maximisation of welfare of the society. Even though there is competition in the private sector the public sector remains free from any competitive forces. The government would play a significant role in the mixed economy. The allocation of resources is often done by the prior planning and therefore the market power of the producers often gets reduced. Conclusion From the above discussion, it is clear that the “invisible hand” can operate successfully only in a free market economy. In such a framework some people would be better off while the others would be worse off in the allocation process (Slater and Tonkiss, 2001, p. 54). However, the government intervention would also bring with it inefficiency in the system of work. A competitive market would be an efficient one as the price and quantities would be determined by the demand and supply mechanism. The government often controls the quantities and the prices by imposing restriction which makes the system inefficient and non-optimal. References Anderton, A., 2009. Economics: A Level Student Book. London: Pearson Education. Black, F., 1995. Exploring General Equilibrium. Cambridge: MIT Press. Tucker, I.B., 2010. Microeconomics for Today. Mason: Cengage Learning. Slater, D. and Tonkiss, F., 2001. Market Society: Markets and Modern Social Theory. Cambridge: Polity Press. Samuelson, P.A. and ‎ Nordhaus, W.D., 2010. Economics. New Delhi: Tata McGraw-Hill Education. Read More