Economic Environment
Economic Systems
Every country has to address itself to some basic problems; they are
Which commodities should be produced?
In which quantities they should be produced?
How they should be distributed?
The countries are classified in to three groups on the grounds of the methods adopted by them for finding answers to these questions.
Free Market Economies
Basic Features
Private ownership of the productive resources: All productive resources in the form of soil, factories,. Means of transport, shops, theatres, newspapers etc are privately owned by individuals and their groups. A Few productive resources may be owned by the government; but their contribution to total production is very small.
Private Use of the Productive Resources: This is a corollary of the 1st feature. As the ownership of the productive resources is with individuals, their use is also with the individuals. Every farmer decides the commodity to be produced in his land. Every industrialist decides the commodity to be produced.
Profit Motive: All Productive activities are undertaken with the intention of earning a profit that is an income. The concerned person has to produce something which would satisfy the want of the community and thereby would increase social welfare but the primary end of an individual in taking up any productive activity is to earn an Income.
Non interference on the part of the government: The government does not interfere in economic activities. The people are free to take up any productive activity and conduct it in their own way, within the legal framework.
Price Mechanism: The production of different goods and services and the allocation of the resources in the production of different goods and services is regulated by the invisible hand of the price mechanism. If the people want larger quantity of a commodity, the demand for that commodity rises. Till the supply rises, the demand exceeds supply with the result that the price of the commodity rises. This is a green signal for the producers. They increase the production of the concerned commodity by diverting productive resources from other commodities to the concerned commodity.
Command Economies
Basic Features
Collective ownership of resources: All productive resources in the form of land, factories etc are collectively owned by the government which is the representative of the society. Few productive resources may be left in private ownership but their contribution to total production is negligible.
Collective Use of Resources: All productive activities are undertaken by the government as a representative of the community. The use of few resources may be left to individuals.
Welfare Motives: The productive activities are guided by the welfare motive and not by the profit motive. A commodity needed by the community is produced in the required quantity irrespective of the profit or loss made in its production.
Complete Control by the Government: All Activities relating to the production and the distribution of goods and services are completely controlled by the government. The people have no freedom of production and restrictive freedom of occupation and even of consumption.
Administered Prices: The prices of different goods and services are fixed by the government under the expert advice of the planning authority. The price may cover / may not cover the cost of production.
Mixed Economy
India has adopted mixed economy with the intention of procuring the advantages of both and avoiding their disadvantages. He features of a mixed economy are as follows.
Distribution of Ownership of Resources between Government and People: Some resources are owned by the government and some other resources by the people.
Distribution of Productive Activities: The productive activities are divided between the government (Public Sector) and the people (Private Sector). Normally the basic industries, the Capital Goods Industries, The Heavy Industries are placed in to the public sector and the light and consumer goods industries in the Private Sector.
Welfare Motive and Profit Motive: The activities of the public sector are guided by the welfare motive whereas the activities of the private sector are guided by profit motive. They balance each other. This ensures earning a profit and also a high level of public welfare.
Government control over Productive Activities: So far as the public sector is concerned, it is completely under the control of the government. The private sector is indirectly controlled by the government.
Regulated Prices: The prices of goods produced in the public sector are decided by the government; even the prices of the products of the private sector are regulated by the government to balance the interest of the producers on one hand and of the consumers on the other hand.
