BASIC PROBLEMS

Economic systems
ECONOMIC SYSTEMS AND RESOURCE
ALLOCATION
Resources are limited
Wants are unlimited
 Decision regarding using the limited
resources
What are the Basic problems?
CAPITALISM
 Free and Private enterprise
 Factors of production are owned by few people

 Rest will sell their services for wages

 Arise out of Industrial revolution and factory system

 Pure capitalist system from 18th and 19th centuries

FEATURES
 Private property
 Profit motive

 Personal freedom

 Competition

 Price mechanism
MERITS OF CAPITALISM
 Enables higher levels of production
 Best utilization of resources

 Consumer is the king

 Stimulates invention

 Simple and automatic in its working

DEFECTS OF CAPITALISM
 Gross inequality: Rich become richer and poor becomes
poorer
 Wastage of resources: advertisements, multiple products

 Monopoly

 Economic instability: trade cycles

 Poverty in the midst of plenty

SOCIALISM
 Resources owned by the state
 Production& Distribution done for the welfare of the
people and not for the profit of individuals.
 Private property and private enterprises very little

 Nationalisation of assets
FEATURES
 State ownership
 Production & distribution by the state

 Central planning and control

 Controlled production and consumption

 Social security

 Reduction of inequalities
DEFECTS
 Little efficiency
 Wastage of resources

 Burden of administration high

 Lack of choice for consumer

 Loss of liberty
MIXED ECONOMY
 Merits of both system combined together to achieve
greater welfare
 Existence of private and public sector

 Planned economy

 Features of capitalism and socialism: Profit motive and

social interest will be blended
 Private initiative and accumulation of private property
allowed
DISADVANTAGES
 Defects of both system
 Work of the private sector and public sector will overlap

 Mixed economy may not remain mixed for a long time

 Public sector will enlarge and swallow the private sector

PROBLEM 1
What commodities should be
produced and in what Quantities?
Essential or non essential goods and
services?
Food grains, clothing and houses
Adequate Quantities
PROBLEM 2
How commodities should be
produced?
Method of production
Public/private /cooperative sector?
Technology to be used
Maximum goods at minimum cost
without wasting resources
PROBLEM 3
 For whom are the goods to be produced?
 Problems of distribution of the produced goods.

 If the products are expensive , the poor cannot afford

them.
 So goods have to be produced cheap for all to afford
DECISION MAKING
 State takes the decisions to solve these problems.
 Democratic government : Parliament

 Dictator: Arbitrary decisions

 Every country tried to solve these problems by

organising its economy
ECONOMIC SYSTEM
 Economic system refers to how people organise
themselves to satisfy their want
 Capitalism or Free enterprises

 Socialism

 Mixed economy