Why are there economic systems

But we must be aware that this is a very simplistic example. Things are much more complex in the real world. For one thing, markets rarely operate without outside influences. Circumstances also have a habit of changing. What would happen, for example, if income rose and buyers were willing to pay more for apples? The demand curve would change, resulting in an increase in equilibrium price. This outcome makes intuitive sense: As demand increases, prices will go up.

What would happen if apple crops were larger than expected because of favorable weather conditions? Farmers might be willing to sell apples at lower prices. If so, the supply curve would shift, resulting in another change in equilibrium price: The increase in supply would bring down prices. The model is commonly applied to wages, in the market for labor. The typical roles of supplier and demander are reversed.

The suppliers are individuals, who try to sell their labor for the highest price. The demanders of labor are businesses, which try to buy the type of labor they need at the lowest price.

The equilibrium price for a certain type of labor is the wage rate. Economists can measure the performance of an economy by looking at gross domestic product GDP , a widely used measure of total output. GDP is defined as the market value of all goods and services produced by the economy in a given year.

In the United States, it is calculated by the Department of Commerce. GDP includes only those goods and services produced domestically; goods produced outside the country are excluded. GDP also includes only those goods and services that are produced for the final user; intermediate products are excluded.

For example, the silicon chip that goes into a computer an intermediate product would not count, even though the finished computer would. If GDP after adjusting for inflation goes up, the economy is growing; if it goes down, the economy is contracting. Economic growth is the increase in the amount of the goods and services produced by an economy over time.

It is conventionally measured as the percent rate of increase in real GDP. Growth is usually calculated in real terms, i. These two measures, which are calculated in slightly different ways, total the amounts paid for the goods and services that a country produced.

All these are characterized by the ownership of the economics resources and the allocation of the same. For instance, in a Capitalist Economy, the capital is privately owned and distributed with governmental oversight and regulation. On the other hand, in a Communist Economy, the state itself takes on the task of allocation of resources according to the needs of the different sectors.

In a mixed economy, the state looks after some sectors whereas it frees up the other sectors for private participation. Apart from this, the extent of governmental or state intervention determines the kinds of economic systems that are classified accordingly.

In many ways, each of these systems has their own pros and cons when it comes to the welfare of the citizens. This is the predominant economic system in the world today.

In this system, the capital is privately owned and distributed. The distribution mechanism is left to the market to allocate the resources with the emphasis being on efficient allocation of capital.

Thus, perfect knowledge and perfect competition are assumed to be given and the market mechanism is taken to determine the beneficiaries and the recipients. Of course, the state is expected to have regulatory mechanisms in place and ensure that the market corrections are supervised and the state steps in whenever there is a crisis of liquidity or other market failures. As we are currently witnessing the different kinds of state interventions arising out of the credit crunch, it becomes apparent that this kind of economic system may not be the ideal one as was being propounded over the last few decades.

In this economic system, the four kinds of land, labor, capital, and entrepreneurship are the types of production that make up the mechanism for production and distribution of resources. Capitalism is an economic system wherein private companies and individuals own property and capital goods. The fundamental basis of capitalism is that the market or the forces influencing the market determines prices and production in the economy.

In other words, the amount produced as well as the prices of goods and services are determined primarily by the supply and demand for those goods and services. As a result, capitalism is often referred to as a market economy , which is in stark contrast to a centrally planned economy by a government or command economy. Pure capitalism—an extreme form of capitalism—is also known as laissez-faire capitalism.

In pure capitalism, private property rights and freedom of contract are the dominant frameworks of production and trade. The laissez-faire economy evolves out of a system of respected private property rights. Pure capitalism means that the less government involvement in the economy, the better off are its citizens and businesses, as well as the entire economy.

Laissez-faire roughly translates from French to mean "let do" or "leave alone. In this extreme form of capitalism, property owners—including the owners of machines, capital, and other input resources—may contract and trade with each other as they see fit, irrespective of the wants of government.

A mixed economic system is an economy in which there exists private ownership by businesses and individuals i. In a mixed economy, the state allows varying degrees of freedom between producers and consumers. A mixed economy places varying limits on property rights as well. Property owners are restricted with regard to how they exchange with one another. These restrictions come in many forms, such as minimum wage laws, tariffs, quotas, windfall taxes , license restrictions, prohibited products or contracts, direct public expropriation , anti-trust legislation, legal tender laws , subsidies, and eminent domain.

Nearly every country in the world has a mixed economy, including the United States. Even relatively free-market economies, such as Hong Kong or Australia, are still mixed. In Western democratic republics, property rights may be violated if the plurality of elected representatives deem that such violations are in the public's best interest. In the United States, for example, private ownership of property and production exists whereby the economy generally operates as capitalism.

However, the government does have involvement, such as tax breaks or subsidies for agriculture as well as regulation of companies and capital markets. In fact, I think that most of us would agree we are not designed as a species to live on our own. So why do people need to be around other people?

But I would contend that people need to be together because they are much more likely to survive if they can work together Why are we more likely to succeed when we work together?

Because that is the way we can make use of our differences. One person may be tall, another short, who should pick apples? Who should collect grubs? Who should be our gardener? Having different skills and abilities, and then working in those areas where we are comparatively stronger, creates benefits economists call gains from specialization. The Three Economic Systems. The fact is, because we live in groups, we have to figure out some sort of organizational scheme that assigns tasks to its members.

Indeed, this scheme must do more than that, it must answer all three questions of what to produce , how to produce it and who will consume the results of our productive efforts. Amazingly, we can categorize all the variations of human organization into three types. Now be careful here, no existing economic system is purely one of these categories. All economies are a mixture of the three, but usually one of the three schemes is dominant.

What are the three schemes or systems? This kind of organization depends on culture to make the three decisions. What do I mean by culture? Culture is a set of established norms and values of a society.

When you see someone walking down the street with no shirt on you think it strange not normal. But if you lived in Tahiti you would not give that person a second thought. That is because our society has a different norm than Tahitian society when it comes to shirts. Values and norms are so part of our society that they are almost invisible to us. When I say hunter, what gender do you think of?

Where did your answer come from? Do you think that most people reading this would give the same answer? Do you think that men are always better hunters than women? If you were organizing the island economy when it had people instead of one, what do you think the hunting band would look like after all was said and done?

Speaking in large general terms after all this is an economics class, not an anthropology class , the values and norms of a culture are the result of past behaviors, or more simply put, traditions. After a while, you discover that fishing is great in spring and summer but poor in fall and winter. What would you produce in the winter? After 80 years, when someone said they were going fishing in winter, the community might chastise or ridicule them for breaking with tradition There goes that crazy Bob, fishing in the middle of winter.

Is he stupid or what? We must sacrifice him in order to appease the gods. Traditions are strong and difficult to change and societies that use them tend to be very stable. In part, this is because most traditions have evolved over time and have proven to be effective. Also, traditions are so integrated into the members of that society that they see them as just and right values. Today we see the vast differences in wealth in the United States as fair and just.

In many other societies such differences would be seen as unfair and unjust. Many westerners see the treatment of women in the Middle East as unjust and unfair. But many women in this region feel that the treatment of women in the West is immoral and sinful.

This means that traditional societies a very reluctant to change because the existing arrangements are seen as successful and just. The three economic questions that must be answered are answered by looking to the past. What have we produced in the past? Whether it was wheat or corn, that is what we will produce now. How did we grow corn in the past? That is how we will do it now. Who consumed the corn? Those who traditionally got the corn will get it again.

Sometimes traditional systems look like the other systems. For example, many traditional systems will have a leader, chief or king, making them look like a command system. Be careful here. What is the dominant custom of the society? How did the leader become leader? Is the leader an absolute ruler? Can the chief or king do anything they want?

Traditional chiefs, kings and so forth cannot easily change a tradition. It is unlikely that they would be successful in ordering the community to fish when the tradition is that of not fishing at this time. The Czar of Russia traditional leader could not change the way the farmers traditionally carried out their craft, but Stalin a leader in a command system not only could, but did even though it led to the starvation of millions of people.

The traditional system is by far the most common form of economic organization used by humans through history. It can be fairly simple, like the hunting gathering clans of Neolithic societies or fairly complex like the Feudal societies of 10 th century Europe. As I said earlier, societies that use just tradition are rare.