How basic economics problem like,
“What to produce”
“How to produce”
“How much to produce for whom to
produce”
Are solved by different economic system
We have four economic systems as:
1.
Capitalistic-economy
2.
Socialistic-economy
3.
Mixed-economy
4.
Islamic-economy
v Market economy allocates resources through the market forces, or
price mechanism
v A planned economy or in socialism basic problem are solved by
administrative decisions.
v A mixed economy contains the feature of both the market and planned
economic system.
v In Islamic economic system all the problems are solved in
accordance with the will of almighty Allah.
Capitalistic economy
In a capitalistic economy decision are made by price mechanism and
basic economic decisions like what to produced, how to produced, how much
produced, and how to distributed are solved by the price system.
Price mechanism: “a
system under which the major economic decisions are made keeping in view the
prices of various commodities”.
What is to be produced?
Every good and service has price. The people sell their services
and the money. They express their demand by spending income. They cast rupee
votes in favors of goods they like cost. The firm which receives most of the
votes produces more and more next time. If the consumer does not like a product
of a firm they will not purchase it. The producer will be discouraged. The
producer will produce only those things which the consumer likes and is ready
to pay the price. Thus, price is the regulator of both consumption and
production. We conclude that through prices a consumer guides the producer that
producer that which thing he should produce.
How the goods are to be produced?
In order to maximize the profit, producer will prefer the cheapest
combination of different factors of production. If he finds that production on
small scale is economical machinery, he will employ labor. Therefore price
mechanism brings equilibrium between different industries. For example
transport industry is more profitable than agriculture; people would prefer to
invest in transport. We conclude that allocation of resources is governed by
the price mechanism.
How the production should be distributed?
The national income or total out-put is distributed among the four
factor of production by the price mechanism. The reward of each factor may be
called its price. The price paid for land, labour, capital, and organization is
called rent, wages, interest, and profit. If the supply of labour is greater
than the demand, the wages will fall. We conclude that in capitalistic economy
the reward of each factor is determined through the market forces. Now we are
so much used in this system that we do not bother to recognize its importance.
But its failure may causes break down. During the World War II, excessive issue
of money in “GERMANY” has rendered it worthless.
In socialism (decision are made by state)
In socialism economy basic economic decisions like what to produced,
how to produced, how much produced, and how to distribute’ are solved by the
state.
A planned economy or in socialism basic problem are solved by
administrative decisions. The centrally controlled economy does not allow the
free play of market forces in the economy.
v The economy is managed by the state.
v The main economic decisions…..like
what to produce and for whom to produce are made by the central authority.
However, while producing the consumption goods, central authority,
keeping in view the likings of the consumers and effort it made to produce
those goods which the consumer like.
v The decision of how to produce goods
is also made by the central authority.
After comparing the cost of various factors of production,
government adopts the cheapest combination of factor of production. If
production on large scale is found economical than small scale, the goods will
be produced on large scale.
v In a socialistic economy nobody has the right to utilize the
resources of the country.
The planning agency fixes the reward of labour keeping in view the
quality and quantity of work. Profit under socialism does not belong to private
sector.
v Profit goes in the pocket of government and it is issued to pay
credit and loans.
IN MIXED ECONOMY (ROLE OF PRICE MECHANISM)
A mixed economy contains the feature of both the market and planned
economic system in a mixed economy, the economic decision of:
v What, where and for whom to produce
goods are mainly determined by price mechanism.
In a mixed economy, there are certain industries which owned by
the state. In these industries all these decisions are made by the
government in the best interest of the nations.
As regards the private industries, these industries are
governed by the price mechanism. The consumer convey their preferences thought
prices, it indicates that supply is less than the demand. The producer will increase the production. In
case of fall in price the supply of the commodity is reduced. The solution of
this problem is also hidden in price mechanism that how the goods are to be
produced. The prices or various factors of production should be employed.
v The distribution of national product
among four factors is also solved by the free play of market forces.