*What to produce? *How to produce? *Who is to receive the products produced? Note: *These questions arise due to unlimited wants and limited resources. *These questions will differ in different economic systems.
DIFFERENT ECONOMIC SYSTEMS
Planned Economy- For example Cuba etc *It is also called Centrally planned or Command or Collectivist economy. *Government takes decisions regarding the three fundamental questions. *Majority of the land and Capital are owned by the State and employs workers. *For State-owned enterprises the government gives instructions calledDirectives. *Basic products like education,housing etc are provided by the State at free of cost or less price.
Market Economy-For example U.S.A etc
*It is also called Free enterprise economy. *The Consumers takes decisions regarding the three fundamental questions. *Preference of the consumers is shown through Price Mechanism, for example if there is demand for a product which means people are willing to pay more, if price increases the firms will produce the products in large quantities to earn more profit. *Here more resources will be utilised for the products which has more demand. *Here government intervention is minimum *Land and Capital are owned by the Private sector. *Some firms use Capital Intensive Technology[more machines with less manpower] and others use Labour Intensive Technology [more manpower with less machines] to achieve Least cost of production.
ADVANTAGES OF MARKET ECONOMY
*It should be very responsive to changes in consumer demand. *Here there is choice for Consumers,Producers and Workers.For example Consumers can choose which firms to buy from etc. *Profit motive and competition promote efficiency. *High incomes provide people to work hard where firms will expand. DISADVANTAGES OF MARKET ECONOMY *Consumers and private firms take into account the cost and benefits to themselves and not the cost and benefit of others. *Competition between firms should ensure efficiency but in practice there may little competition. *Firms cannot respond to the desires of the consumers because they cannot attract the workers who lack the right skills or geographically immobile. *Private firms will not make products unless it is charged. *Advertising can distort consumer choice. *Here there is uneven distribution of income.
MIXED ECONOMY-For example India etc
*It is a combination of the features of planned and Market economy. STATE INTERVENTION *The government should take into account all cost and benefit. For example Railways would not make a profit in the private sector but it should be maintained by the State if the benefit to the society is greater than the cost. *Government encourages the consumption of merit goods through subsidies/provide information/passing legislation. *Government can finance the production of products that cannot be charged. For eg.Defence etc. *Government intervenes the private sector from exploiting the consumers by charging high prices. *Government take steps to utilise maximum resources like labour etc to create more jobs. *Government encourages the private sector to use more resources in future to capital goods. *Government helps the vulnerable groups to have access to basic necessities and create even distribution of income by taxing the rich.
CHANGES IN ECONOMIC SYSTEMS
*Countries like UK,New Zealand etc moved from Mixed economy to Market economy. *Here government intervention is reduced. *Countries like Poland,Russia etc moved from Planned economy to Market economy. *Here Consumer choice was increased with increase in quality,income inequality and poverty. *Recently most of the countries have Market economy with Government intervention.