Principles of Microeconomics

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TABLE OF CONTENT

1.0 INTRODUCTION OF TYPES OF ECONOMIC SYSTEM……………….2

1.1 Command Economy………………………………………………………..3

1.2 Traditional Economy……………………………………………………….3

1.3 Market Economy…………………………………………………………...4

1.4 Mixed Economy…………………………………………………………….5

2.0 EXPLANATION ON THE SELECTED ECONOMIC SYSTEM………….6

3.0 IDENTIFICATION AND DESCRIPTION OF THE PROBLEMS IN

SELECTED ECONOMIC SYSTEM…………………………………………………7

3.1 Resistance to change………………………………………………………..7

3.2 Lower productivity………………………………………………………….8

3.3 Less innovation……………………………………………………………...8

4.0 SUGGESTIONS TO OVERCOME THE SELECTED ECONOMIC

PROBLEMS……………………………………………………………………………10

4.1 Determine to change………………………………………………………..11

4.2 Increase productivity……………………………………………………….11

4.3 Increase innovation…………………………………………………………12

5.0 SUMMARY……………………………………………………………………..13

REFERENCES

PRINCIPLE OF MICROECONOMICS Page 1

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1.0 INTRODUCTION OF TYPES OF ECONOMIC SYSTEM

Economic system is a system for producing, distributing, consuming goods and services.

In other word, economic system is an organized way in which a state or nation allocates its

resources of goods and services in the national community. It is including the arrangement of

the assorted agencies, institutions, consumers, entities that comprise the economic structure

of a given society or community. Economic system comprises the related concept in the

method of development. It also includes:

How a combination of agencies and institutions are interrelated to one another

How information enthusiasms between them

How social relationships within the system which include property privileges and the

development of management.

There are various types of economic system adopted by countries around the world. As

far as I am concerned, there are four types of economic system. They are, Command

Economy, Traditional Economy, Market Economy and Mixed Economy.

Between these four types of economic system, there are some numerous characteristics

that distinguish them to one another. It is because, every country do not adopt the same

economic system as the source of resources are not the same between each country. Each

country usually adopted the system which is related to their resources.

1.1 Command Economy

Command economy is a system where the government, rather than the free market,

determines what goods should be produced, how much should be produced and the price at

which the goods will be offered for sale. Command economy is also known as a planned


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economy, whereby, command economies are unable to efficiently allocate goods because of

the knowledge problem which the central planner's inability to discern how much of a good

should be produced. Shortages and surpluses are a common consequence of command

economies.

Command or planned economic system is a free-market price system. On the other

hand, it is a signal to producers on what they should be creating and in what quantities,

resulting in a much more efficient allocation of goods. The command economy is a key

feature of any communist society. Cuba, North Korea and the former Soviet Union are

examples of countries that have command economies. Usually, the economic system in which

government of these said example countries are planning to dominate the direction of

economic activity and market forces are not allowed to do so to any significant point.

1.2 Traditional Economy

A traditional economy is a very underdeveloped economy that often depends on

agriculture as its main base. Perhaps hearkening back to its agricultural roots, a traditional

economy is also known as a survival economy which it contains the meaning of an

underdeveloped economy in which populations use primitive utensils and methods to harvest

and hunt for food, which often resulting in tiny economic development.

On the other hand, traditional economy can be said that it is a system where traditions,

customs and belief systems determine its operation. In that state, this type of economic

system may go unchanged for quite some time. Traditional economies are often found in

rural and remote are in regions. Once this economy does begin to change or we can say that

when the countries that develops their economies past the traditional level, usually transform

into the other systems which are into the market economies or command economies.


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As for the detail, two countries which would be examples of this would be many of

the African countries which use agriculture as their main basis for growing food and for jobs.

In addition some Asian countries, such as Bangladesh and Burma also rely on farming which

is agriculture as their main way for both employment and for producing food for the family

and the nation. As we can see most of the African countries and the said countries in Asia are

far behind leaving their neighbouring countries in terms of economy, development and

attractiveness. The government of these said countries should do something better using their

resources to develop the country as well as the citizen in those countries.

1.3 Market Economy

Market economy is an economic system in which economic decisions and the pricing

of goods and services are guided solely by the combined interfaces of a country's citizens and

businesses. Moreover, it can be said that here is little government involvement or dominant

planning. This is the opposed of a centrally planned economy, in which government decisions

drive most characteristics of a country's economic activity.

In a nutshell, market economies work on the theory that market forces such as supply

and demand which are the best factors of what is right for a nation's successfulness. This

economy seldom engages in government involvements such as price fixing, license quotas

and industry subsidizations.

The example of a country with a market economy is Brazil. Other countries that is

categorised under the market economy include Kenya, India, United Kingdom, Nicaragua

and Peru, just to name a few. A free market economy is viewed as the most effective way to

allocate a country's resources by most financial analysts. Although the market economy is

clearly the system of choice in today's global marketplace, there is important argument


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concerning the volume of government involvement measured the ideal outcome for efficient

economic processes.

1.4 Mixed Economy

A mixed economy is an economic system that includes aspects of more than one

economic system. This usually means an economy that comprises both privately owned and

state owned enterprises. On the other hand, mixed economic system can be said that it

combines elements of capitalism and socialism or a mix of market economy and planned

economy characteristics. This system overcomes the disadvantages of both the market and

planned economic systems with its advantages and strength that will help the country to be

more competitive in terms of economic stipulation.

As for the example, I would like to express my words on the two largest countries in

the world which adopted this mixed economic system, they are United States of America and

China.

The United States is a mixed economy because the factors of production are owned by

the private sector and the government does get involved in decision making. The government

will determine what infrastructure will be built and the government has approved laws

putting many limitations and regulations upon private industries.

Meanwhile, China is a mixed economy because, although it went many years without

government acknowledging the role that markets play, it has recently been relaxing many

restrictions on market-based activity. This trend began in the agriculture industry and in

industries where the activities were extremely local in nature. The government now

welcomes letting some industries be controlled by market forces, while at the same time the

government totally controls other larger industries that might affect the country’s growth.


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2.0 EXPLANATION ON THE SELECTED ECONOMIC SYSTEM

For this further discussion, I would like to select the Traditional Economic System as the

main course of discussion. For me, the traditional economy is and interesting system to be

discussed because it does not allow for much economic growth and development in the

country who practicing this system which changes is very slow and also there is very little

social mobility.

As far as I am concerned, traditional economy does not take advantage of technological

innovation resources that existed in their country and some more, there is relatively little

promotion of intellectual and scientific development.

Perhaps, there might have a few incentives for entrepreneurs but it is limiting choices for

consumers and lowering their citizen and cultures of standards of living. There are three

problems that occurred in this economic system that I could recognize which are

Resistance to change

Lower productivity

Less innovation.


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3.0 IDENTIFICATION AND DESCRIPTION OF THE PROBLEMS IN SELECTED

ECONOMIC SYSTEM

3.1 Resistance to change

In this particular economic system, people who are living in this system, I shall call it as

economic culture, most of the people refuse any changes that will make them become more

develop and comfort in the future. Resistance is displayed in the form of projection,

avoidance and aggression. Most of them tend to think that existing methods and procedures

which are followed by their descendants for several numbers of generations are correct and

perfect.

Hence, by doing that, they are destroying or delaying their development as technologies

are keep on developing from time to time to ensure that methods and procedures are better to

increase productivity, efficiency, and effectiveness of the outcome. But, in this traditional

economic system, they tend to follow the same methods and procedures which in turn lead to

lower productivity whereby will drive to lower development of the society and thus the

country as a whole.

A government who adopting the traditional economic system may introduce a new law in

it country, but there will be some people or might be all of the societies may not agree with

because they are in the comfort zone of practicing the old methods and procedures. In all

these and many other scenarios, the resistance to change and how well it is managed can be

critical for success.


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3.2 Lower productivity

Traditional economic system is having itself a very untidy movement of development

by refusing any better changes to be made. Besides that, traditional economic system also

lack in powering up the level of productivity which it does have enough resources to make

the productivity better than it has now.

As far as we know, productivity is one of the main factors that might affect one’s

economic system to improve or driving to the next level of development. As far as I am

concerned, productivity level is very important in any economic system and I shall say that it

will help the economy to be more powerful or develop, hence will make the society and

country will be more competitive throughout the world.

Due to this lower productivity, the society will have lower standard of living than

other economies which does not follow traditional economics. The society will be left far

behind by the people in the other countries who adopted the economic system better than this

traditional economic system.

3.3 Less Innovation

Innovation is one of the main or important factors that affect economic system. This is

because innovation will help the society and country to be competitive and productive among

the other countries. In this traditional economic system, the society in this system are lacking

in exploring and exposing to any innovation development. For them, they are at the comfort

zone of following the old methods and procedures whereby they do not put some effort of

innovation towards the methods and procedures which they supposed to. By doing so, the old


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methods and procedures which they are adopting will be more comprehensive and effective

to them.

Besides that, I could say that the societies in the traditional economic system are also

the type of people which they have to do their job which they are told to do. Every day they

have to do the same and unproductive job which they do not want to do and also they do not

like it, therefore, it will lowering down their productivity and the outcome or the end product

will be less quality and less innovative.

Intensive growth is powered by the discovery of ever better ways of innovation to

manage the workers and resources wisely. This is the sort of growth that allows continuous

improvement in incomes and welfare, and enables the society and country who adopting this

economy to grow better. Without any doubt, this is hardly unusual for most of the human

history, growth in output and overall economic welfare has been slow and halting as there are

lacks in the innovation process.


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4.0 SUGGESTIONS TO OVERCOME THE SELECTED ECONOMIC PROBLEMS

4.1 Determine to change

It can be determined that people resist change for various reasons relating to

expectancy, instrumentality and valence. Expanding and simplifying on that, people resist

change due to the manner in which change is introduced, the inconveniences that change

comes with, fear of the unknown and lack of proper communication of the change among

other factors.

To manage resistance to change, communications lines must be kept open with a safe

and open atmosphere. This enables people to freely express their needs, understand the

change and become more participative. In the practical matter “participation” will be as a

device is a good way for the government to think about the problem. In fact, it may lead to

the better understanding of societies towards the changes they are facing with.

In order to instil the mind-sets of change for better, the government or the people who

have the power in controlling the economy have to look for trends in the resistance. There

will usually be patterns to the resistance. In the major elements of the change which will be

getting a warm reception but the numbers of feedbacks are low, the government may need to

adapt a new communication approach a bit so that the societies will feel more comfortable

and hence will make them be in the acceptance category.


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4.2 Increase productivity

Productivity is a key economic indicator of the nation's financial health. Productivity

can be defined as output per worker hour. Strong productivity usually indicates an economic

boom. When firms are able to use fewer workers to produce more, the result is an increase in

profits, wages, and the standard of living overall, while inflation remains under control.

When looking at what makes an economy grow in the long run, it is imperative to

begin by examining how output is created. Firms use a combination of labour and capital to

produce their output. Labour consists of the workers and employees who produce, manage,

and process production. Capital describes both the ideas needed for production and the actual

tools and machines used in production. Ideas and other intellectual property are called human

capital. Machinery and tools are called physical capital.

The government should control all of these factors which are directly affecting the

economic growth of its country together with the standard of living of its societies. It is

important to remember that increases in capital can take the form of both quantity and quality

increases. It is clear that the only way to achieve labour productivity growth is to increase the

amount of capital, physical and human which are available to workers. In the long run, the

only way for overall productivity to increase is in the capital used in production.


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4.3 Increase Innovation

Indeed, a key driver of this growth has definitely been innovation. The creation,

distribution and application of knowledge have become a major device of economic

expansion. The government have come to rely more and more on this precious tool. It is a

practice that has moved from the boundary of many government programmes right to the

centre of their strategies for growth and leadership. Innovation today is the crucial source of

effective competition, economic development and the transformation of society.

In the modern knowledge economy, various forms of new knowledge, especially in

technology are the serious factors in the basic industrial innovation, competitiveness, and

economic growth. The government programme focuses on how and why companies innovate

to compete and how companies can secure the financial returns from their investments in

innovation.

The government have to ensure that the developed programme for the development of

innovation can be passed and exposed to all the societies in order to make them clearer about

the government’s goal on the innovation. The government should directly take part in

distributing the knowledge, providing the technologies and controlling the corporates in order

to make the programme successful and thus will make the society’s standards of living

become better from time to time.


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5.0 SUMMARY

As for the conclusion, the main point of this discussion would be the changes to be

made, productivity and innovation. In the traditional economic system, the government who

runs the country adopting the traditional economic system should have the tolerance in

providing a good and quality understandable knowledge to the societies. This is because, if

they are trying to make an improvement or changes about the methods and procedures in the

country, the societies will have the guts to follow their ruling government’s agenda so that

there will be no issue on resistance to change by the societies.

For the productivity, my recommendation is that the government who is practising

the traditional economic system should increase its added value among the workers in order

to ensure that the productivity will increase from time to time. This is because the

productivity is crucial and important factors in a country to improve its economic strength

and its value towards a better nation. In fact, by providing a correct and quality guidance of

skills and knowledge about producing productivity towards the societies, the country will

build its economic strength to a certain level whereby it can help the country to be more

competitive among the other countries.

On the other hand, innovation is most of the powerful and influenced factors that

could build up an economic system. In this case, for the traditional economic, the government

who is governing the country with the traditional economic system should create the

opportunities to bring in and build up innovation in the country. This is because, from time to

time, innovation is important to succeed the economic system because by using the

innovation to build up the strength, it will make the country to be known among the other

countries by inventing some new innovation on technologies. In fact, it will make the

countries to be more competitive and added value to its economic strength. (2937 Words)PRINCIPLE OF MICROECONOMICS Page 13

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Reference

N. Gregory Mankiw. (1997). Principle of Microeconomics. United States of America: South

Western.

Gary S. Fields and Sergei Soares. (February, 2002). The Microeconomics of Changing

Income Distribution in Malaysia. Malaysia: Kuala Lumpur.

Grace Chen. (May, 2013). Malaysia Taps Into Muslim Tourism Market. Khabar South East

Asia: Malaysia, Kuala Lumpur.

John O'Callaghan. (June, 2013). Singapore, Malaysia face economic hit from prolonged

smog. Yahoo News.

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Principles of Microeconomics