Chapter 4: Types of Economies Flashcards
What are the 3 types of economies on the basis of ownership of means of production?
Capitalist Economy, Socialist Economy, Mixed Economy
What is the meaning of Capitalist Economy? (3 points)
Capitalism is a form of economic organisation in which means of production like land and capital are owned by private people. People are free to make use of this wealth. The economy is based on free private enterprise. Economic activities of entrepreneurs are guided by self-interest and profit motive. Capitalistic economy is also known as free economy and laissez-faire economy.
What is the meaning of Laissez-faire economy?
It means that there is no interference of the government in the economic activities of the nation.
Where and when did this system of economy emerge?
This kind of system emerged out of the industrial revolution in England during 1760-1820.
What are the 6 features of the Capitalistic economy?
- Private property and inheritance: Everybody has a right to acquire private property and pass it on to the next of heir after their death.
- Freedom of enterprise and Contract: Every individual has freedom of enterprise and is also free to enter any contract.
- Freedom of consumption: It is the freedom of consumption, that determines the nature of goods and services to be produced in an economy.
- Market Mechanism: It is also known as the price mechanism. The market forces determine the allocation of resources and bring adjustment between varied wants and given scarce resources. Adam Smith considered the price mechanism as an invisible hand, which automatically solves the problem relating to production and consumption decisions.
- Profit Motive: The main objective of every producer is to earn maximum profit. All economic activities are guided by the sole purpose of profit.
- Competition: High degree of competition in the commodity as well as factor markets promote economic efficiency. Only efficient firms would survive.
What are the the 7 merits of the Capitalistic Economy?
- Abundance of goods: The producers produce such goods which have a higher margin profit.
- Best Resource Utilisation: Resources are used in the most efficient manner. Every person works in their own interest. The different factors of production are used most effectively.
- Technological Progress: Producers spend large amounts of money on research and and development. Competition motivates producers to invent new techniques of production.
- Cheap and Best goods: Production is carried out on a large scale. Low cost goods are available to consumers. Goods are also of standard quality.
- Incentive to hard work: Producers put in hard work to produce more and earn more profit. So, capitalism provides encouragement to the daring and enterprising individuals.
- Economic freedom: Producers produce goods according to their choice. Consumers are free to spend any amount according to their will.
- Increase in production and standard of living: Capitalism leads to increase in production and national income.
What are the 8 demerits of the the Capitalistic Economy?
- Inequalities in the distribution of income and wealth: The rich become richer and the poor become poorer.
- Class Conflict: Society is divided into 2 classes: haves and have-nots. Industrial unrest and disharmony become a normal feature of the economy.
- Unemployment: There is a vast competition. Due to unplanned production, there is always a possibility of over-production, which creates the fear of unemployment and retrenchment in the minds of workers.
- Exploitation: The rich always exploit the poor.
- Wastage of resources: Country’s resources are diverted to the production of luxury goods which are in great demand and the production of necessary goods suffers.
- Economic fluctuations: Under capitalism, price fluctuations are commonly seen. Unplanned production leads to either over-production or under-production of goods. This accounts for great instability and uncertainty in the market.
- Self interest in place of social welfare: The main motive of the entrepreneurs is to make maximum profit at the cost of the workers and society.
- Unbalanced Development: Only those regions are developed which are good from the profit point of view. With this reason, some parts of the world are more advanced and developed and the others are underdeveloped.
What is the Definition of Socialism?
In order to remove exploitation of man by man, a new economic system emerged, which is known as socialism. Socialism is an economic system where means of production are owned and managed by the whole community. It is an economic system in which the means of production are owned by the whole society and operated by the government for the benefit of the whole society.
What are the 3 crucial things that Socialism emphasises on?
- Means of production are in the hands of the state or the entire community.
- The use of resources is carried out through planning.
- Social welfare is the chief motivating force behind all the economic activities.
What are the 6 features of Socialism?
- Social Property: All properties belong to the society. All the means of production such as land, mines, factories, banks, trade, etc., are owned by the state.
- Government is the only producer: The production of various commodities is under the control of the government.
- Social Welfare: The motive of profit in capitalism is replaced by the motive of welfare in socialism.
- Economic Planning: In such an economy, development is carried out in accordance with a central plan. The Central Planning Authority takes important decisions such as ‘What to produce?’, ‘How to produce?’ and ‘For whom to produce?’.
- Economic Equalities: Socialism aims at introducing equality in distribution of income and wealth. It also aims at providing equal opportunities of employment to all irrespective of caste, creed or religion.
- Absence of Competition: Under socialism, the govt. is the only producer. Therefore, there is no scope of competition among different production units. Instead there is spirit of mutual cooperation.
What are the 5 merits of Socialism?
- Better Allocation of Resources: This is ensured because of the following reasons:
- Socialism is based on the motive of welfare instead of profit motive.
- Allocation of resources is made by the Central Planning Authority to promote social welfare.
- There is no wasteful expenditure on advertisement, etc., under socialism.
- Social Justice: Nobody is allowed to earn large unearned incomes like rental and interest incomes.. Exploitation of man by man is eliminated.
- Economic Stability: A socialist economy is essentially a planned economy. There will be no price fluctuations and no unemployment.
- Social Security and Welfare: Government undertakes various social security measures such as compensation for unemployment and accidents, sickness and maternity benefits, old age pension, death grants, etc.
- Rapid Economic Growth: Socialism ensures rapid economic growth of a nation in the following manner:
- All the available productive resources are used properly and in a planned way. Therefore, there is no scope of wastage of scarce resources.
- Under Socialism, the state adopts economic planning which is certainly a superior way of development as compared to the mechanism of price.
- Under socialism, rates of saving and investment can be greatly raised which are very essential for rapid economic development.
State the 5 demerits of Socialism
- No incentive for hard work: In this system people are simply made to work according to the dictates of central authority. This reduces the people to the status of mere wage earners. Their jobs are protected whether they are efficient or inefficient.
- Loss of Freedom: Consumers are compelled to accept whatsoever commodities are produced by the government. People are not able to enjoy civil and political freedom. They have no freedom of speech.
- Loss of efficiency: There is loss of efficiency for many reasons. First, there is lack of incentive to motivate the people to work hard and improve efficiency. Second, production units are managed and controlled by bureaucrats, who are not as efficient as private entrepreneurs.
- Red Tapism: Since all activities under socialism are performed by the govt. and its officials, there is a great possibility of delay and wastage of time for performing different tasks. The essential decisions are not taken at the appropriate time.
- Concentration of Economic and Political Powers: Government has absolute authority in the country, which increases the power of the govt. over other individuals. There is every possibilities that a handful of politicians and bureaucrats may become dictators in the country as was the case with Stalin in Soviet Russia who functioned as a dictator for about three decades. Socialist economies have often become authoritarian economies.
Why isn’t there complete equality of income in Socialism?
Income inequalities arising out of the right to property and law of inheritance do not exist in socialism. But those income inequalities which arise out of the differences in efficiency and skill prevail. Hence, complete equality of income is neither possible nor desirable under socialism;
What is the meaning of Mixed Economy?
It is a mixed form of capitalism and socialism. Under this system, both public and private sector work together to ensure maximum social welfare. It appreciates the advantages of private enterprise and private property with their emphasis on self interest and profit motive, At the same time the govt. puts full control on private enterprises to check the defects of these private enterprises.
What are the two types of Mixed Economy?
The first type of mixed is that in which the means of production are in the ownership of private entrepreneurs and the government intervenes in the economic affairs indirectly. It regulates and controls the activities of private enterprises through direct controls (such as price control, licensing system, control over imports, etc.) and monetary and fiscal policies. This type of mixed economy is known as ‘mixed capitalist system’.
The second type of a mixed economy is that in which the government not only regulates and controls the private enterprise through various types of direct controls and appropriate monetary and fiscal policies, it also directly participates in the production of various goods and services. This type of economy exists in most of the developing countries.
