Subject: Principles of Business

Class: 4th Form

Date: October 2023
Teacher: Ms. M. Patton
Topic: The Nature of Business
Sub-topic: Types of Economic Systems
 Objectives

At the end of the lesson you should be able to:

1. Differentiate among the types of economic systems.

2. Explain the features of the different economic system.

3. Discuss the advantages and disadvantages of the different

economic systems.
 Key Terms

▪ Economic System- An economic system is a means by which societies or

governments organize and distribute available resources, services, and goods
across a geographic region or country. In other words, it is the way in which a
society allocates scare resources to produce goods and services to satisfy wants of
the population.

▪ Efficiency- is the fundamental reduction in the amount of wasted resources that

are used to produce a given number of goods or services (output).
 The Economic Systems

Countries had to develop economic systems so that the key decisions

about what to produce, how to produce, and who will receive goods and
services can be determined. The different economic systems are:

▪ Traditional [subsistence]
▪ Command or Planned [Socialist]
▪ Free Market [Capitalist]
▪ Mixed [public and private]
 The Economic Systems

In determining which economic system a government of a country has in place, some key
characteristics must be considered:

1. Level of government involvement: How high is the government’s control of the economy?
2. Level of freedom of choice: Do producers have the freedom to produce desired goods and
services? Do consumers also have the freedom to choose from a variety of goods and services?
3. Ownership of resources: Are resources largely owned by the state or by the private sector?
4. Price fixing: Are prices set by the state or by market forces of demand and supply?
5. Ownership of profits: Are profits from business owned by the state or by private individuals?
Traditional Economic System
[Subsistence]
 Traditional [Subsistence]

This is based on traditions and customs where nearly the entire population is engaged in
agriculture and produce enough food for their needs.
In the early days of development in the Caribbean, the island were populated by indigenous
people who lived a largely subsistence way of life. Trade was carried out primarily through
bartering. People who populated the island learned to provide for themselves through fishing,
hunting, subsistence agriculture and collecting fruits and berries.

E.g. in early societies, the Taino tribe produced enough food to satisfy their need
using the barter system
 Traditional [Subsistence]

Subsistence therefore relates to producing enough goods and

services to live, but without making a significant surplus to build
for the future. This economic system is simple, but limited.

Examples of Countries: Villages in Haiti, villages in South

America
 Features of a Traditional [Subsistence] Economic System

▪ Traditional economies are often based on one or a few of

agriculture, hunting, fishing, and gathering.
▪ Barter and trade is often used in place of money.
▪ There is rarely a surplus produced.
 Advantages of a Traditional Economic System

▪ Traditional economies produce no industrial pollution, and keep

their living environment clean. Traditional economies only produce
and take what they need, so there is no waste involved in producing
the goods required to survive as a community.

▪ Every member plays a role in either generating or supporting the

production of goods and services. This helps to bring unity among
persons.
 Disadvantages of a Traditional Economic System

▪ Traditional economies have to continually work to produce those goods to

survive. There are no weekends off or vacations. To sustain a traditional economy
means working hard with long hours, with no guarantee that the caribou will be
caught or that crops will survive extreme weather.

▪ In a traditional economy, there are few career choices. Specific roles in a

traditional economy are handed down from generation to generation. If your
father was a hunter, you'll be a hunter, too. In a traditional economy, change is
largely shunned, as change threatens a society's chances of survival.
Command or Planned Economic
System
[Socialist]
 Command or Planned [Socialist]Economic System

This economy is one in which government creates plans for the production of goods,
jobs and how goods are allocated between citizens of the country. In other words, a
planned economic system is one in which all the economic decisions are made by the
government.
All resources and products are decided by the government e.g., health, education
Some Caribbean countries such as Cuba is a good example of a country in which
(until recently) most of the decisions were made by the state. Guyana is another
country in which many industries have been nationalized to become state controlled
and managed.
 Command or Planned [Socialist]Economic System

In a socialist economy, long-term plans will be made by the government.

E.g. a five-year plan for production that sets out what the lead industries will be and
how resources will be allocated to these industries.
State planning may focus more resources on capital industries (such as the ones that
make machinery and equipment) and public utilities (such as electricity and
railways), and fewer resources on consumer goods industries (industries producing
goods for consumers).

E.g. of countries with planned economy- North Korea, Cuba, China

 Features of a Command Economic System

▪ The government controls all aspects of the economic production.

▪ The government decides how resources are distributed and used.

▪ The government needs to make the decisions.

▪ The government can determine the price of goods and services.

 Advantages of a Command Economic System

▪ There is a fair distribution of goods and services [wealth and income]the

government determines how goods are distributed.
▪ Citizens in these economies enjoy a least a basic standard of living as the
government provides all goods and services.
▪ There is less waste of resources
 Disadvantages of a Command Economic System

▪ Resources are wastefully allocated as consumers are not free to indicate

their demand for goods and services. Therefore resources are not sent to
where they are most needed but into industries based on the government’s
decision.
▪ The lack of competition reduces innovation and the motivation to produce
quality output and force prices down
▪ There is less incentive to work hard to earn more or make profits
Free Market Economic System
[Capitalist]
 Free Market [Capitalist] Economic System

A free market economy is one in which the decisions on how to produce, and
what to produce are made by private businesses and consumers. This type of
economy relies on demand and supply. Consumers effectively ‘vote’ for the
goods they want by buying them, and businesses respond by serving these
requirements, suppling goods that will recap a good profit for the capitalists
(owners of the businesses).

E.g. of Capitalist Countries: Canada, USA, Germany

 Features of a Free Market Economic System

▪ Private ownership of resources.

▪ Freedom to participate.
▪ Freedom to innovate.
▪ Customers drive choices.
 Advantages of a Free Market Economic System

▪ Competition among business will result in increased quality of output and

lower prices.
▪ Competition also leads to innovation i.e. newly invented goods, services
and production processes.
▪ Consumers are free to choose the goods and services that they wish to
purchase and therefore production is based on their demands.
 Disadvantages of a Free Market Economic System

▪ Consumer exploitation by suppliers may go unchecked by government as

there is little or no government intervention.
▪ There is an unequal distribution of wealth as goods are purchased by only
those who can afford it.
▪ In the case of no government intervention public goods such as postal
service, streetlights and roads are not provided.
Mixed Economic System
[Capitalist]
 MIXED
Mixed (PUBLIC
[Public AND
& Private] PRIVATE)
Economic System

A mixed economy is one in which economic resources are owned and controlled by
both private and public sector. It combines elements of command (state) planning
with the free market. Some key decisions are made by the government, which might
own some industries such as public broadcasting, water and electricity. However,
many decisions will be made by large and small businesses, who will have
considerable freedom to make their own business decisions.

E.g. of Countries in a Mixed Economy: Iceland, France

 Features of a Mixed Economic System

▪ It protects private property.

▪ It allows the free market and the laws of supply and demand to determine
prices.
▪ It is driven by the motivation of the self-interest of individuals.
 Advantages of a Mixed Economic System

▪ The government is free to make laws to protect consumers from unfair

trading practices through the regulation of businesses.
▪ Economic benefits of competition coupled with goods and services are
provided by government for those who cannot afford to access these
through the market system.
▪ A wide variety of goods are provided by both government and private
individuals.
 Disadvantages of a Mixed Economic System

▪ Public sector companies tend to be inefficient as they are supported by

taxpayer’s money.
▪ Government regulatory policies may reduce the enthusiasm of the private
sector e.g. the setting of prices of goods and services resulting in the closure
of businesses.