ECONOMIC ENVIRONMENT Introduction To understand meaning of economic systems, it refers to the role or model of distribution and production which

take place in the society. Business is considered as an organized economic activity. The primary objective of any business is to product and sale goods or services. It exists to serve people living in the society with differ means. There are some questions which a economic system must answer:

What to product and service to provide The organized of both the production and services What are the methods to distribute products and services

Definition of Economic Systems According to Loucks definition of economic system is that it consist of those institutions which a given people or nation or group of nations has chosen or accepted as the means through which resources are utilized for the satisfaction of human wants. According to Gruchy, It is an evolving pattern or complex of human relations which is concerned with the disposal of scarce resources for the purchase of satisfying various private and public needs for goods and services. CHAPTER OUTLINE Types of Economic Systems Capitalism Socialism Communism Mixed Economy Capitalism Characteristics Advantages Disadvantages Socialism Characteristics Advantages Disadvantages

 Communism Characteristics Advantages Disadvantages Mixed Economy Characteristics Advantages Disadvantages Conclusion Q.1. Explain in detail the Types of Economic Systems. There are four types of economics systems namely

Capitalism or Private Enterprise Economy Socialism Communism Mixed Economy or Government and Private Sector

What is Capitalism? Capitalism is that part of economic systems where productions are owned and managed by private individuals and institutions. Or it is economic individualism wherein the individuals are the one to decide what and how much to produced and distributed. They are at liberty to use any technique of production and produce anything they like. In this economic system, State is to take care of only internal and external security of the country. Normally the activities related to Defence, Police, Administration and Courts of Justice are controlled by the government. A private enterprise economy characterized by the existence of business fluctuations and considerable unemployment. In capitalism there will be considerable ups and downs swings of the business cycle with their inevitable repercussions on the people. Main Characteristics of Capitalism 1. 2. 3. 4. 5. 6. Right to own property Profit motive Private ownership of means of production Consumers sovereignty Economic freedom Social division of people

7. Price mechanism What are the Advantages and Disadvantages of Capitalism? Advantages of Capitalism 1. 2. 3. 4. 5. Reduction in cost of production due to efficient control Efficient control of production process Improved quality of goods Consumers choice is given full weight Varieties of products

Disadvantages of Capitalism 1. 2. 3. 4. 5. Inequality in the distribution of national wealth Fluctuations in the level of employment Class conflicts Waste of talents Heavy expenses on publicity result into increase in cost and price of the commodity

What is Socialism? In socialist economic system means of production are owned and managed by the State. Ownership of means of production is not allowed. In socialism economic activities are carried on mainly for social gains and personal interest is of less significance. In this economic system the anti social activities like smuggling and hoarding find no place. Economic activities are planned with the motive of social benefit by a central planning authority. The individuals in socialistic society surrender their economic freedom in exchange of assurance of freedom from wants by the State. It is the responsibility of the State to provide food, lodging and clothing besides other requirements, by assigning a suitable job to each one of them. Characteristics of Socialist Economic System Following are the characteristics of socialism 1. 2. 3. 4. 5. In socialism means of production are owned by the State Economic activities are planned by the central planning authority Absence of competition Equal opportunities to all No economic freedom to the people

Explain the Advantages and Disadvantages of Socialism. Advantages of Socialism Following are the benefits or advantages of socialism Greater Efficiency Economic efficiency under socialism is greater than under capitalism, the means of production are not left in the market forces rather they are controlled and regulated by the central planning authority towards chosen end. The central planning authority makes an exhaustive survey of resources and utilizes them in the most efficient manner. 1. Greater Welfare In a social economy, there is less inequality of income as compared to capitalist economy because of the absence of private ownership of means of production. In socialist economic system every one works hard and paid as per his skills and ability. 2. Absence of monopolistic practices One of the benefits of socialism is that it is free from monopolistic practices to be found in a capitalist society. Since under socialism all means of production are owned by the state, the exploitations by the monopolist are absent. Instead of private monopoly, there is state monopoly over the productive system but this is operated for the welfare of the people. 3. Absence of business fluctuations A socialist economy is also superior to a capitalist economy that is free from business fluctuation. Generally planned economy co-ordinates the action of various producing units, prevents discrimination between saving and investment and make full use of available resources. It is able to control over production and avoid general deflationary trend. 4. 4. Economic Growth Economic growth is an important advantage of socialism because it adopts economic planning as a means of promoting rapid economic growth. A planned socialist economy functions right according to the plan in a systematic and orderly manners and marches rapidly on the road to economic progress. Disadvantages of Socialism Following are the demerits or disadvantages of socialism.

1. Elimination of Individualism There are many disadvantages of socialism the major one is is the lack of economic freedom. In socialist economic system everything is controlled by a centralized body. Individuals are not allowed to own any assets, everything belongs to the state. Workers are assigned specific jobs and are not allowed to change them without consent from the planning authority. 2. Red-Tapism and Inefficiency In socialism there is a lot of involvement of bureaucracy and are the drivers of all economic machinery. The work civil servants are not comparable with the private entrepreneurs. Civil servants merely do the jobs because it is their duty and they will get paid whatever the consequences. Thus inefficiency arises and in the long run the economy suffers. 3. An Artificial System As a socialist economy is a planned economy, every aspect of the economy is to be determined by the government. Forces of demand and supply do not apply which is one of the disadvantages of socialism. Thus in the long run the economy becomes state rather than wasted, whereas these make an economy prosper. 4. Consumers Suffer In the final analysis it is the consumer who loses out. Sovereignty of consumer does not apply in a socialist economy. Consumers do not enjoy the status of a consumer as in a capitalist economy. Choices of goods and services are able to maximize their total satisfaction. 5. Economic Equality Socialists claim more equal distribution of wealth but practically it is proven that complete economic equality is virtually impossible. There is a distinction between the rich and poor. Moreover since it is a planned economy the poor suffer even more. 6. Non-existence of economic and political freedom Freedom of enterprise, freedom in choice of occupation and many other essential freedoms for an economy to prosper are out-rooted from society. The true spirit of democracy dies away. The basic needs wAlthough it has been agreed that the six basic needs in life are met within a socialist economy but all this is obtained at the expense of economic and political freedom.

7. Non-existence of Competition It is due to competition that an economy becomes prosperous. The competition between producers and consumers leads to the production of a good quality product which may even be relatively cheap here it is one the disadvantages of socialism. Thus talents and initiatives of mankind develop and in the ultimate analysis the country incurs rapid growth. What is Communism? Communism is an economic system where means of production are controlled and managed by a Central State Authority, and there is also a restriction on the ownership of personal property. In communism personal belongings, as clothing, watches, and shoes are allowed to be owned by individuals and the houses are owned by the State. In communism individuals are assigned work by the State and they are given a bit remuneration of their service normally in kind. People get ration from Government department. People do not have choice of their own. They have to be content with whatever is prescribed for them. State provides all social services such as educational, recreational and hospital facilities. Advantages and Disadvantages of Communism Following are the merits and demerits of communism Advantages of Communism

Following are the merits of communism Careful life Full employment of manpower Rapid development and economic growth Equitable distribution of wealth

Disadvantages of Communism

Personal freedom is lost Workers are treated as machines Materialistic approaches to life problems Central State Authority holds all means of production

Definition of Mixed Economy

Mixed Economy is an economic system which combines in itself the features of capitalism and that of the Socialism. Meaning of Mixed Economy Unlike a pure capitalistic economy, Mixed Economy has an important public sector, i.e. a number of industries which are owned and managed by the state. The State is not the all pervasive owner of all means of production. Private enterprise is allowed and even encouraged to operate a large number of industries and to own the various means of production. Thus in this economic system the public and private sectors exist side by side. It supports reduction in the inequality of incomes and seeks to achieve it through the fiscal machinery. It acts as a welfare state and undertakes a large number of functions and promotes the welfare of the common man. In Pakistan we have mixed economy. The public utility concerns like Post and Telegraph, Electricity etc. are managed by State. There is also semi-public sector which includes all the concerns, which are jointly owned and managed by the private individuals and the State. Industrial, trading and commercial enterprises are also owned and managed by the individuals and they collectively constitute the private sector. State the Advantages and Disadvantages of Mixed Economy. Merits & Advantages of Mixed Economy Following are the merits and advantages mixed economy 1. 2. 3. 4. Interest of the people is well served Adequate incentive to work hard Resources may be properly utilized Rapid development is possible

Demerits & Disadvantages of Mixed Economy Following are the demerits and disadvantages of mixed economy 1. 2. 3. 4. Concentration of wealth in few hands Existence of anti social activities Wastage of resources Interest of Common man suffers