PRINCIPLES OF BUSINESS

Economic Systems
Key Terms

Economic System
the basic economic questions.

Basic Economic Questions: Scarcity forces society to consider three issues: What to produce with the
available supply of resources? How to produce these products (methods or techniques)? Who should
benefit from the production of these goods and services?

Merit Goods: Products funded by the state because of the potential benefits to society e.g. health care,
education, medicines

Demerit Goods: Products which produce negative externalities, where the social costs are borne by the
society e.g. Gambling, cigarettes, alcohol

Public Goods: Goods provided to the public or society. These goods are non excludable in that all
members of society stand to benefit from production of these products. It is the government that
provides these goods for the benefit of all citizens e.g. roads, street lights, defence.

Describing Economic Systems

Criteria Subsistence Command, Free, Capitalist or Mixed Economy

Economy Controlled or Market Economy
Planned Economy
Description Use direct State or government Private ownership of Existence of both
production to satisfy in charge of factors the factors of the private and
needs of production production public sector.
Early or traditional
economy
What to produce? Decided by the Decided by the state Decided by the Decided by the
individual e.g. a or government on consumer and consumer and
farmer based on his behalf of citizens businesses that private businesses
needs produce what as well as the state
consumers want
How to produce? Decided by the The state decides Decided by the Decided by the
individual; usually the means of private private sector
involves simple production and the entrepreneur businesses as well as
methods of factor inputs into the state
production; labour the process
intensive
For whom to For self; for survival For all citizens ; For persons or Public sector
produce? provide public goods business groups who provides for all
to benefit all of are willing to citizens; Private
society demand sector for individual
with the ability to

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 PRINCIPLES OF BUSINESS
pay
Motive Survival To provide for the To make a profit Private sector: to
welfare of citizens maximize profits
Public sector: to
provide for the
welfare of citizens

Some Advantages and Disadvantages of Economic Systems

Economic System Advantages Disadvantages

Subsistence Economy Utilizes natural resources to Limited choice of goods available
meet needs Individuals could not produce
everything to satisfy their needs
Command , Controlled Basic needs of society are met Lack of consumer choice
or Planned Economy Provision of public goods No competition to government can
result in low quality products
Free, Market or Greater choice of products Provide de-merit goods
Capitalist Economy available to meet consumer Lack of provision of public goods
demand Increased inequality between rich
Competition stimulates the and poor
economy and product
development
Mixed Economy The government provides the Government may seek to control the
public goods that the private private sector
sector will not provide
private sector investment

Structured Questions

1. Differentiate between a 'planned economic system' and a' free market system'. (4 marks)

2. Outline the role of the government in a mixed economic system. (4 marks)

3. Define the term 'subsistence economy'. (2 marks)

4. State ONE advantage and ONE disadvantage of

(i) a mixed economic system (2 marks)

(ii) a planned economic system (2 marks)

(iii) a free market system (2 marks)

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