ECONOMIC SYSTEM

ECONOMIC SYSTEM

An economic activity is that which is concerned with the production, distribution, exchange and consumption of goods and services. An economic system is therefore described as the mechanisms and arrangement which controls and allocates scarce resources in society for production, distribution, and exchange of goods and services.

There three basic types of economic system which are;

Ø Capitalism (free market economy)

Ø Socialism (planned economy)

Ø Mixed economy (dual economy)

1.6.1 Capitalism is a socio economic system based on the abstraction of resources into the form of privately owned capital, with economic decisions made largely through the operation of a market unregulated by the government. That is the economic activities are controlled by private individuals, without the interference of the government.

Features

Ø Individuals and firms, owns the means or production and distribution of goods and services

Ø There is freedom of choice in that consumers decide to spend their money on goods which gives them maximum satisfaction,  firms decide which goods to allocate their resources to in order to earn maximum revenue and increasing output.

Ø There is an exclusion of government intervention and inclusiveness in the means of controlling the production and distribution of the resources. They only provide and enabling environment for the activities of Individuals and firms, to carry out their economic activities.

Ø There is consumer sovereignty in that the consumer decides what to produce. The entire production pattern is based on the desires and demand of the consumer.

Ø The maximization of profit is the main motive of the producer.

1.6.2 Socialism is a socio economic process in which the state (government) has the means of production, distribution and exchange and consumption of goods and services.

Features

Ø Means of economic activities that is the production, distribution and consumption of goods and services are owned by the government.

Ø It is a central planned economy, whereby the means of production are in the hand of a central authority.

Ø There is an equality of Income distribution

1.6.3 Mixed Economy is an economy system that combines the characteristics of both the capitalist and social economic activities. There is an Involvement of the economics agents (Individual, firms and government), in the means of controlling the economic activities. The feature of this economic system is an attribute of both the capitalist and the socialist economy.