Mind Map Gallery Economy Systems
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Economy Systems
Economic systems refer to the structures, policies, and mechanisms by which societies manage their resources, production, distribution, and consumption of goods and services. Economic systems can be broadly classified into different types, depending on how they approach resource allocation, wealth creation, and market regulation. Each system has its own characteristics, strengths, and weaknesses, and may affect different aspects of economic activity, such as income distribution, innovation, or environmental sustainability.
Edited at 2023-09-09 17:31:57
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Economy Systems
Free market economy
Market-Based Economy: This economic system relies on markets where businesses and consumers make decisions about what to produce, buy, and in what amounts. No Government Control: There's no government involvement, and decisions are based on supply and demand.
characteristics
(Motivation)Economic Players: In the economy, we have consumers, producers, factor owners, and the government. -Self-Interest Motivates: Everyone aims to benefit themselves. -Consumers want the most satisfaction.Producers want the most profit.Factor owners want the most income. -Government for the Community: The government is motivated by what's best for the community, not personal gain.
(Consumer sovereignty)Consumers Drive Production: What consumers want determines what gets made. If people want something, it will be produced.
(Private ownership)Most Property Private: Individuals and organizations own most things. Government Protects Property: The government's job is to make sure people's property rights are respected through laws.
(Free enterprise)Freedom to Trade: Owners and producers can freely buy and sell what they have. Government Limits Few Things: The government only restricts a few items, like firearms, from being bought and sold.
(Competition)Competition Happens When Free: If businesses and workers can use their resources as they want, competition naturally occurs. Examples: Producers compete by setting prices, and workers compete for wages.
(Decentralised decision making)Freedom to Choose: People in a market economy can decide how to use their resources as they want. Decentralized Decision-Making: Decision-making happens independently among individuals and isn't controlled from a central authority.
The market mechanism
What to Produce: Producers look at potential profit as a signal to decide what goods to make. They make things people want to buy. How to Produce: Producers compete by offering the lowest prices. To stay in business, they need to make things at the lowest cost possible. So, they use efficient techniques. Result: Productive Efficiency: This competition in a free market leads to efficient production methods.
Advantage
Simplified Bureaucracy: No need for complex government bureaucracies to make economic decisions.
Supply and Demand: Economic decisions respond to supply and demand conditions
High Competition: Strong competition between firms keeps prices low and encourages efficiency.
Consumer-Centric: Consumers have the power to choose which goods are produced and at what prices.
Disadvantage
Limited Competition: Some industries are dominated by a few big firms.
Inefficiency Risk: Lack of competition and high profits can reduce the incentive for firms to be efficient.
Inequality: Unequal distribution of power and property can occur.
Socially Undesirable Practices: Some firms may engage in socially undesirable practices
Lynas: An example of such a situation is the company Lynas.
Command/ Planned Economies
characteristics
Government Allocates Resources: The government makes decisions about how resources are used.
Rationing in Pure Planned Economy: In a pure planned economy, the government rations everything from education to food.
Shift to Mixed Economies: Many former planned economies transitioned to mixed economies in the 1990s and 2000s.
Performance Issues: Planned economies often performed worse than other types of economies.
Lack of Freedom: Citizens often felt they had limited freedom in planned economies.
Advantage
High Growth: Government-directed investment can lead to high economic growth rates.
Reduced Unemployment: Careful planning can efficiently allocate labor based on skills, reducing unemployment.
Income Equality: A planned economy can promote more equal income distribution among citizens
Disadvantage
Loss of Individual Liberty: Complete state control means less personal freedom for individuals.
Enforced Unpopular Plans: The government might enforce its plans even if people disagree with them.
Lack of Worker Freedom: Workers may have limited personal freedom and may be treated like machines.
Materialistic Focus: The system may prioritize materialistic goals over other aspects of life.
Exclusion of Non-Material Pursuits: Non-material pursuits like spirituality, morals, and intellect may be neglected.
Mixed economy
Combination of Market and Command: It's a mix of both market and planned economies. Balance Between Market and Planning: Resources are allocated through a more equal mix of market and planning processes.
characteristics
(Motivation)Mixed Economy: It's a mix of market and command economies, where both methods of resource allocation are used more equally.
(Ownership)Mixed Ownership: Private individuals and the government both own a share of the factors of production.
(Competition)Competition in Private Sector: In the private sector, there is competition, so consumers have choices. In the public sector, resources are allocated through planning, leading to limited choices for consumers.
(Government Role)Regulate Private Sector: The government regulates private sector activities to ensure competition and property laws are upheld. Provide Merit Goods: The government provides goods like education that consumers might undervalue but have positive effects on society. Offer Public Goods: Public goods, which wouldn't be provided in a pure free market, are supplied by the government. Ownership of Key Sectors: The government may own key sectors like railways, postal services, and electricity.
Advantage
State Provides Essentials: The government offers essential services like hospitals and orphanages.
Private Sector for Profit: The private sector operates for profit in other areas.
Price Competition: Competition in the private sector keeps prices low.
Consumer Choices: Consumers have choices in the private sector.
Disadvantage
High Taxes Reduce Incentives: Heavy taxes can reduce the motivation to work hard or make profits.
Public Sector Less Efficient: Public sector (government) operations are often less efficient than private sector ones.
Excessive Control Adds Costs: Too much control over businesses can increase costs and discourage entrepreneurial activity.