Lecture 2: Economic Systems

Economic Systems

ECO 211 Principles of Microeconomics: Prof A. K.

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 Economic systems
 An economic system is a system of production and exchange of
goods and services as well as allocation of resources in a
society.
 We have 2 main economic agent i.e. households and firms
 The role that the government plays in the economic activities
determines the economic system

ECO 211 Principles of Microeconomics: Prof A. K.

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 Main economic systems
 We have 3 of them:
a) Command economy: decisions are mainly made by the
government
b) Free enterprise economy: economic decisions are made by
the private sector, the government only plays a facilitative
role.
c) Mixed economy: both the government and the private
sector make economic decisions

ECO 211 Principles of Microeconomics: Prof A. K.

3 Waithima
 Command economy - advantages
a) Government ensures full employment
b) Economies of scale is possible due to large-scale production
c) Essential goods and services are provided for
d) Emphasis is laid on providing a range of goods and services
for the wider population
e) Can achieve equal distribution of wealth

ECO 211 Principles of Microeconomics: Prof A. K.

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 Command economy - disadvantages
a) Consumers have little influence on what is produced
b) Due to lack of competition, there is no incentive to be
efficient
c) The size of the government can be very large and therefore
inefficient

ECO 211 Principles of Microeconomics: Prof A. K.

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 Free enterprise economy- features
a) Ownership of factors of production is in private hands
b) There is freedom of choice and enterprise
c) Competition ensures that goods and services are
competitively priced.
d) Reliance on price mechanism. Price is determined by
forces of demand and supply.
e) Limited role of the government

ECO 211 Principles of Microeconomics: Prof A. K.

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 Free enterprise - advantages
a) Hard work is rewarded
b) People have choice on where to invest
c) Less efficient producers are edged out due to competition
d) Respond well to changes in consumer tastes and
preferences

ECO 211 Principles of Microeconomics: Prof A. K.

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 Free enterprises - disadvantages
a) Unequal distribution of wealth
b) Price mechanism does not provide for public goods. PG
have non-rival in consumption and non-exclusion.
c) Producers ignore social costs; results in externalities
d) Wasteful due to competition

ECO 211 Principles of Microeconomics: Prof A. K.

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