Business Environment 4_ economic systems

The lecture provides How Economic Systems Attempt to Allocate and Make Effective Use of Resources through types of economic system, the allocation of resource and argument for and against privatization

HOW ECONOMIC SYSTEMS ATTEMPT TO ALLOCATE AND MAKE EFFECTIVE USE OF

RESOURCES

DO FURTHER READINGS ON CHAPTER 5

ECONOMIC SYSTEMS

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Types of Economic Systems

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Definition:

 A FREE MARKET ECONOMY has no government control over factors of

production (land, labour, capital) It is also known as MARKET ECONOMY

 A COMMAND ECONOMY does not have a private sector as all resources are

owned by the state

 A MIXED ECONOMY has both a private sector and a public (state) sector

Types of Economic Systems

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There are three different types of economic system which are used by countries to manage their resources as efficiently as possible

 Free market economy

Features:

 no government control over land, capital and labour

 businesses produce goods to make a profit

 prices of goods are influenced by demand and supply of goods

Types of Economic Systems

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 Free market economy

Advantages

 freedom to choose goods and services

 owners able to keep all profits after paying taxes

 wider range of goods and services (more new business setups)

 competition to keep prices low

Types of Economic Systems

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 Free market economy

Disadvantages

 no government provided goods or services such as health and education

services, available to everybody Benefits only those who can afford to pay.

 uncontrolled economic booms or recessions

 monopolies are created in order to increase price Limited choice for customers

MONOPOLY - a business which controls all of the market for a product

Types of Economic Systems

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 Command or planned economy

 the government or the state plans and controls the use of resources.

 no private property

 government decides what to produce, what to work and what work to perform

Types of Economic Systems

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 Command or planned economy

Advantages:

 eliminate any waste resulting from competition between firms

 work for everybody

 needs of population are met, but little production of luxury goods for the wealthy

Types of Economic Systems

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 Command or planned economy

Disadvantages:

 less incentive to work as government fixes wages and private property not allowed

 government may not produce goods which people want to buy

 lack of profit motive for firms leads to low efficiency

Types of Economic Systems

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 Mixed economy

 combines some features of both a free market economy and a command economy Nearly every country in the world has a mixed economy

Types of Economic Systems

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 Mixed economy

Advantages:

 Private sector made of businesses not owned by government.

 make own decisions what to produce, how to produce and what price to charge

 Public sector made up of governemnt – or state-owned and controlled businesses and organisations.

 Some goods and services are provided free of charge (e.g health and education services)

 Money comes from taxpayers

 Profit is not always an aim but public service

Types of Economic Systems

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 Mixed economy

In many countries, the government controls the following important industries/organisations:

 health

 education

 defense

 public transport

 water supply

 electricity supply

The Allocation of Resources pages 131-132

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It is the distribution of the country’s available resources due to SCARCITY.

Three (3) Aspects to this core problem of scarcity:

 What goods and services will be produced?

 How will these goods and services be produced?

 To whom will the goods and services be distributed?

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Should the government own and control less than it does?

In many parts of the world, there has been a very important change in the balance between the public and private sectors in recent years Many

governments have sold off businesses they previously owned to new owners in the private sector This is called privatisation.

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Arguments in favour of privatisation:

 private owners with profit motive leads to business efficiency

 encourages competition to keep price low

 important business decisions will be made for business reasons – not by

governments with politics in mind (eg.building of new power station to create jobs)

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Arguments against privatisation:

 unprofitable but important services may be closed (eg closing a country bus route or not delivering letters to isolated districts)

 increasing efficiency to raise profits caused workers to lose jobs

 creation of monopoly leading to higher prices

 only few people will benefit from owning the business whereas before

privatisation, the whole country could benefit from any profits made

TASK 2A

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RESEARCH WORKSHOP

1. Identify and explain Viet Nam’s economic system

2. Identify the RESOURCES available within Viet Nam How does the economic system of Viet Nam attempt to allocate and make effective use of resources available within the country?