Chapter 5 System

7/31/2019 Chapter 5 System

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Introduction to Economics

Prepared by K.S. Pang, (2012)


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Chapter 5: Socio-Economics System

Economic Systems rarely exist in a pureform. The following classification of systems is

based on the dominant characteristics of

those systems


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Economics System is an attempt to manage anentire national economy through planning hasbeen the most ambitious type of government

intervention Planning is the process by which key economic

decisions are made or influenced by centralgovernments

Governments control just like managing alarge and big firm


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Government make decision on:

What to produce?

How to produce?

Whom to produce?


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As we know that, government planning iscontrasts with concept oflaissez-faire whichstated that economic should entirely rely on

market force to determine the speed,direction, and nature of economic evolution

However, especially after the Second WorldWar many nations are need planning as adirect route to recover the economicdevelopment


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The major difference between all types of

economics system is the difference on

government intervention

They are either low, medium or high degree

level of intervention of government

We must remember that the concerns of

government towards to the society is

contrasted with Laissez-Faire approach


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3 types of Economics System in the world:

A)Socialism Economics

B)Capitalism Economics

C)Mixed Economics


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Socialism Economics

The government owns the economic institutions or

major industries.

Prices would be determined by a government planning

ministry.

Government controls the major sectors and industries.

The other enterprises would either be state-owned or

cooperatively-owned and managed by its employees.


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This is similar to Communiststate

The resource ownership is belonging to government

The income distribution is belonging to government

Country example: Cuba, North Korea, Soviet Union


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Capitalism Economics

All industries and enterprises are wholly owned by private

enterprise and profit-oriented

The Investments, distribution, income, production and pricing

of goods and services are predominantly determined through

the operation of a strictly free market

To function an idealized strictly free market concept the

economy must complete absence of any kind of government

intervention


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This is similar to Laissez-faire

The resource ownership is belonging to private

sector

The income distribution is belonging to market.

Country example: United State of America, United

Kingdom, Japan, Hong Kong


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Mixed Economics

This economic system is combine the aspects of more than

one economic system (Socialism + Capitalism)

Means that the economy contains both privately-ownedand state-owned enterprises or that combines elements of

capitalism and socialism, or a mix of market economy and

planned economy characteristicsBut the mixture economy is operates them according to the

rules of supply and demand


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The resource ownership and the income

distribution are mixed ownership of both private

market and government

Country example: Malaysia, Singapore


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Now we discuss how to related laissez faire and

government intervention


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We always prefer freedom and free of

government control then why this dream

failed?

Answer: If failedwe need help from

governmentjust like the son failed and

begging help from father


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What is government intervention?

Example: government regulation, subsidies,

artificial price pressures, government-granted

monopolies and taxes or tariffs.

Under laissez-faire, the role of government is

only providing protection, maintaining peace,

and property rights.


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Laissez-faire is strict free market economy. Thedecisions made are completely free ofgovernment intervention

Based on the natural market force that the supplyand demand will clear the market shortage andsurplus

An equilibrium will be achieved naturally and theprice mechanism as the only indicator of

consumer preferences And is a signal for producer to supply and

consumer to buy


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What iflaissez-faire FAILED?

The intervention of government is still

important especially for developing countries.

laissez-faire failed because of:

A) Market Failure

B) Mobilization & Allocation of Resource C) Attitudinal or Psychological Impact


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A)Market failure:

When the allocation of goods and services bya free market is not efficient.

Market failure can be viewed as a scenario inwhich individuals' pursuit of self-interest leadsto bad results for society as a whole.

The belief that markets can have inefficientoutcomes is a common justification forgovernment intervention in free markets


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Example: A big firm stopping the other new

firms to join the market. And this big firm will

gain a bigger size of the market.

This lead to inefficiency due to imperfect

competition: Monopoly


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B)Resource mobilization and allocation

Communitys resource consists of both naturalresources and human resources.

The well being of society rely on how theresource is going to be used.

Decisions made on how best to use the resourcecan create well being both now and in the future.

Government intervention is to facilitate andcoordinate the efficiency of resource allocation


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Example: A big firm plan to deplete all the

petrol oil in the country for its own profit.

This is not beneficial to the next and future

generation and not environmental friendly

behavior.


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C) Attitudinal or psychological impact

A detailed statement of national economicand social objectives in the form of a specific

development plan can have an importantattitudinal / psychological impact on a diverseand fragmented population.

It may succeed in rallying the people in anational campaign to eliminate poverty,inequality, ignorance, disaster sand disease.


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Example: Lets say the government announce

a town planning which is need the

cooperation from all citizen in the town

Example: The earth quake disaster in Japan on

2011, Japanese willing and voluntary save

water, electricity and resources


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How government plan still plan a significant role incapitalism market?

Policy is the use of government to influence theeconomy

Example: The economy under laissez-faire nowencounter high inflation and high unemployment.What government should do?

a)Monetary policy

b)Fiscal policy

c)Supply-Side policy

d)Direct Control Measures


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a)Monetary policy

-Expansionary Monetary policy:

( i Ms ) to control unemployment

-Contractionary Monetary policy:

(i Ms) to control inflation


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b)Fiscal policy

-Expansionary Fiscal policy

(TG) to control unemployment

-Contractionary Fiscal policy

(TG) to control inflation


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c)Supply-Side policy

Increase the productivity efficiency of inputto push up the production level can control

the problem of unemployment and inflation.


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d)Direct Control Measures

Direct Price Control and Rationing, Compulsory Saving andAnti-Inflation Board to monitor wages and prices by

government can control the problem of inflation.

Provide training and education can increase the humancapital then people will be more productive to secure a job.Besides that, Government also can create job opportunity

to control the problem of unemployment.


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Besides that THREE economic systems that wehad discussed, there is another extreme

economic system in todays world

---Planned Economies

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Chapter 5 System