Economic Systems

Economic System

"Resources are scarce but demands are unlimited." (Anderton, 2000: 273) Therefore, resources have to be allocated in terms of what to produce, how to produce, and for whom to produce. (Case & Fair, 2004) Economic system is a way of answering the three basic economics problem. "An economic system is a collection of laws, institutions and, activities, that provide a framework for economic decision-making." (http://ecedweb.unomaha.edu/lessons/lesson2.htm) Each part of it interacts with each other in the sense that they are the ones who creates and runs an economic system. (Anderton, 2000) Individually there are consumers that consume outputs that are produced by producers in order to satisfy their wants. In a much bigger extent are the firms or trade unions that have bigger influence in the economic system. The most influential 'actor' in an economic system is the government who exercise power and maintain the economic stability. (Anderton, 2000: 273)

There are three types of economic systems, first is the market economy that works according to the price mechanism, next is the planned economy where centralisation is being applied. Of course, both of the mentioned economic systems do not exist in pure form but in a fusion form. "That is the mixed economy, where both private sectors and governments are involved in process of resource allocation." (Bamford, 2002: 29-31)

Allocation of Resources in Planned Economy

"In a planned economy, factors of productions or the resources are under control of the government or the planner." (Anderton, 2000: 273). There is no private ownership and the government is the one who decides what to produce, how to produce and for whom to produce through a planning process.

First, planners have to decide what is to be produced by making surveys on the needs of the people. Planners have to make decisions on the amount of goods manufactured such as the breads, shoes, clothing and so on. They are assumed to be clear of the needs of the people and they decide the aggregate outputs of the economy. (Anderton, 2000)

Secondly, the planner has to decide the quantities and types of resources that are to be employed in different processes of production in order to produce certain amount of targeted outputs. By practicing the method of input-output analysis, planners know the flow of resources in the economy and they know what decision to be made on the scarce resources. Although the planners decide the types of techniques used in the production processes, they don't emphasis on the quality of outputs produced; producers' target is just to produce the amount of goods that is required by the planner. (Anderton, 2000)

Lastly, they make decisions on the type and amount of outputs that are to be distributed to the consumers. In a planned economy, consumers get the same goods but the portions are according to their needs. Say, if a family is bigger, they'll be allocated with more common goods compared to the others. Each consumer's purchasing power is restricted to their actual needs. They buy according to their needs, not their desires. (Anderton, 2000)

Reasons of Why Planned Economy emphasis on the Market Force

Some planned economies tend to place greater emphasis on the market force as market force that is being applied in free market system offers more benefits compared to command system. In a planned economy, the planning process involves large and complex plans which leads to cumbersome bureaucracy and of course, inefficiency in the use of resources as complicated plans are costly to administer. (Sloman, 2000) However, decision making within a market economy is decentralised. Everything reacts automatically towards the Price Mechanism and the changes of demand and supply, that is, the interest of society as a whole and there is no need for costly bureaucracy. (Anderton, 2000)

In a planned economy, resource allocation was under complete control of the state. People suffered from consuming products that are lack of quality and variety as there are no incentives for enterprises to produce quality and innovative products. This is due to the condition where production targets are often set in terms of volume. (Anderton, 2000) On the other hand, market force possesses the elements 'quality' and 'variety' due to competitions among the producers. Manufacturers strive to produce better outputs that suit the consumers' taste and preference and the quantity of outputs are affected by the Law of Demand and Supply, not planner. This leads to contentment of the consumers as they have freedom in making choices.

Moreover, planners of command economy usually can't detect demand accurately, shortages might happen and the queuing system is causing inconveniences to the people.(http://en.wikipedia.org/wiki/command_economy) Where else in free market economy, the economic system reacts instantly to