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History Economics
System
Economic System
and it’s Functions
The Economy’s Working
Parts
Objectives:
At the end of the session, students should be able to:
Economic System
- is a system of production and exchange of goods and
services as well as allocation of resources in a society.
- it includes the combination of various institutions,
agencies, entities and consumers that comprise the economic
structure of a given community.
Economic System and it’s Functions
• What to produce
- the very first problem of economic system, economic
resources which produce goods and services are generally
speaking not abundant in spite to the duty of the government
to see that the economy run as smooth as possible. Therefore,
it is to see that goods and services and produced in
accordance with the availability of resources and in what
quantity and thus, allocation of resources depends upon the
administration.
Economic System and it’s Functions
• Coordination Mechanism
The most striking thing about the choices made by
households, firms and governments is that they must come
into contact with each other. For example, households
choose the types and quantities of labor to sell and firms
choose the types and quantities of labor to buy. Similarly in
markets for goods and services households choose the types
and quantities of goods and services to buy, while firms
choose the type and quantities to sell.
Economy’s Working Parts
There are two mechanism that can achieve a coordination of
individual economic choices:
1. Market Mechanism
A market mechanism is a method of determining what, how
and for whom to produce, based on individual choices
coordinated through market. The market is a coordination
mechanism because it pools together that separate plans of all
the individual decision makers who try to buy and sell any
particular good. The markets coordinate individual decisions
through price adjustments.
Economy’s Working Parts
2. Command Mechanism
A command mechanism is a method of determining what,
how, and for whom goods and services are produced based on
the authority of a central planning authority.
Economy’s Working Parts
However, it should be noted that in actual life, in most of the modern economies, both the command
and market coordination mechanism operate simultaneously. As such these economies are referred to
as mixed economies. Indian economy is the best example of mixed economy.
Thank You
for
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