Comparing Economic Systems

Comparative Economic Systems;

Each nation and society thus must make choices and deciiosn based upon there own values. If a society values meeting more wants and needs at the expense of freedom of choice then they may choose a system radically different then our own. Thus we have seen the creation of a variety of economic systems.
Economic systems are divided up into three basic types. These types are:

• Traditional Economic Systems
• Market Economic Systems
• Command Economic Systems

Traditional Economic System
A traditional economic system is one in which people's economic roles are the same as those of their parents and grandparents. Societies that produce goods and services in traditional ways are found today in some parts of South America, Asia, and Africa. There, people living in an agricultural village still plant and harvest their own food on their own land. And the ways they produce clothing and shelter are almost exactly the same as those used in the past. Tradition decides what these people do for a living and how their work is performed.

Market Economic System
A market economic system is one in which a nation's economic decisions are the result of individual decisions by buyers and sellers in the marketplace. The U.S. has a market economic system. When you finish school, you may go to work where you choose, if a job is open. You are also free to go into business on your own. Suppose that you decide to open a business. You will risk the money that you have saved or borrowed in the hope that you will be successful. The price that you charge for your goods or services will be influenced by the prices charged by your competitors (other businesses selling the same items). The success that you have will depend on the demand by consumers for your goods. You may do extremely well. But if people do not want what you are selling, you will go out of business.

Command Economic System
In a command economic system, the main decision maker is the government. No person may independently decide to open and run any kind of business. The government decides what goods and services are to be produced. And the government sells these goods and services. The government also decides how the talents and skills of its workers are to be used.

What are the Functions of economic system?

 Mainly, there are four functions of economic systems; Production, Allocation, Distribution and Regeneration.Every economic system provides solutions to four questions: what goods and services will be produced; how they will be produced; for whom they will be produced; and how they will be allocated between consumption (for present use) and investment (for future use). In a decentralized (usually private enterprise) economic system, these questions are resolved, and economic coordination is achieved, through the price mechanism.
                                                                                                                                                   FUNCTIONS OF AN ECONOMIC SYSTEM
 Economic System everywhere may perform similar functions. These functions may be traditional or non-traditional. The traditional functions include the following:
a. What to produce
b. How to produce i.e. what method of factor combination to adopt in order to maximize the use of the resources
c. For whom to produce
d. How to distribute the goods and services produced.
Economists have realized the importance of economic growth and the attainment of full employment, if the system must achieve the best use of its scarce resources. Attainments of full employment and high economic growth have become the non-traditional functions.

Inflation Definition

What Is Inflation?                                                                                                                                                                                                                                                                                                                 Inflation is when the prices of most goods and services continue to creep upward. When this happens, your standard of living falls. That's because each dollar buys less, so you have to spend more to get the same goods and services. If inflation is mild, it can actually spur further economic growth. If prices rise slowly and gradually, it can encourage people to buy now and avoid future price increases. This increases demand, driving further economic growth.The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Types of Inflation_

It's important to understand the difference between the many different types of inflation. If inflation is more than 50% a month, that's known as hyperinflation. This hasn't happened in the U.S. since the Civil War, but occurred in Germany  before World War II, and in Zimbabwe in the 2000s. Stagflation is when inflation occurs despite slow economic growth. The last time this happened in the U.S. was in the 1970.

                                                                                                                                                                    How Does Inflation Impact On Life?                                                           Inflation usually hurts ones buying power. That's because rising prices means one  have to pay more for the same goods and services. Inflation can help one if you are the lucky recipient of income inflation. one can also benefit from asset inflation, such as in housing or stock , if ones own that asset before the price rises. However, if ones income increases at a slower rate than general inflation, ones buying power declines even if one is  making more. Furthermore, many people can get hurt by an asset bubble if they try to time it, and buy right when the bubble is about to burst. In general, inflation's main consequence is a subtle reduction in ones standard of living.

Objectives of micro-economics & macro-economics:

Objectives of micro-economics:
-  Effects of tax on the income and, their relation on how they affect consumption by consumers.
-  Utilization of the budget sets and constraints in their utilization to achieve indifferences curves.
-  Assists consumer to distinguish between substitutions and income effects.
                                                                                                                                                                                     Objectives of macro-economics:
-  Determination of price stability.
-  Finding out if there is exchange stability.
-  Increase in capital accumulation.
-  Helps in promoting higher employment level through better economy prioritization.
-  Ensures there is fair distribution of national  income.
-  For purposes of achieving  desirable level of consumption.

Differences between Microeconomics and Macroeconomics,

 Differences between Microeconomics and Macroeco                                                                      Micro Economics:
1. Micro Economics studiesthe problems of individualeconomic units such as afirm, an industry, a consumeretc.
2. Micro Economic studies theproblems of pricedetermination, resourceallocation etc.
3. While formulatingeconomic theories, MicroEconomics assumes that otherthings remain constant.
4. The main determinant ofMicro Economics is price                                                                                                                                                                             Macro Economics:
1. Macro Economics studieseconomic problems relating toan economy viz., NationalIncome, Total Savings etc.
2. Macro Economics studiesthe problems of economicgrowth, employment andincome determination etc.
3. In Micro Economicseconomic variables aremutually inter-relatedindependently.
4. In Micro Economicseconomic variables aremutually inter-relatedindependently.

What is the relationship between microeconomics and macroeconomics?

Microeconomics ; Microeconomics is the study of economics in a miniature scale. It breaks down the economy into attributes and analyzes each specific component. Key features are to explore the possibilities of lowering production costs and increasing income.                                                                                         Macroeconomics ;   Macroeconomics is the study of the economy as a whole. The economy’s actions are looked at together. It reflects on the governmental aspect of the economy, regarding tax and regulation actions they address.

The Relationship Between Microeconomics and Macroeconomics__

Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings

Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry.

  Macroeconomic, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross national product t (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.

There is an obvious relationship between microeconomics and macroeconomics in that aggregate production and consumption levels are the result of choices made by individual households and firms, and some macroeconomic models explicitly make this connection. Most of the economic topics covered on television and in newspapers are of the macroeconomic variety, but it’s important to remember that economics is about more than just trying to figure out when the economy is going to improve and what the Fed is doing with interest rates.

Full Employment

   Definition: The definition of full employment would be the situation where everyone willing to work at the going wage rate is able to get a job. Full employment occurs when everyone in the economy who is willing to work at the current market rate for someone of his skills have jobs. Full employment does not imply that all adults have jobs State of economy in which all eligible people who want  to  work can find employment at prevailing wage rates. However, it does not imply 100% employment because allowances  must be made for frictional unemployment  and seasonal factors.

    Optimal Unemployment Level
Another definition of full employment would be the ‘optimal’ level of unemployment. In practise, an economy will never have zero unemployment because there is inevitably some frictional unemployment. This is the unemployment where people take time to find the best job for them. Frictional unemployment is not necessarily a bad thing. It is better people take time to find a job suitable for their skill level, rather than get the first job that comes along.                                                                                                          
                                                                                                                                                                                 Full Employment and Full Capacity.
Another way to think of full employment is when the economy is operating at an Output level considered to be at full capacity. i.e. it is not possible to increase real output because all resources are full utilised. This would be a point on a Production possibility frontier. It can also be shown by AD/AS diagram.

Diagram of Full Employment

In this diagram full employment would be at an output of Y2. Here any increase in AD only causes inflation. In practise it is difficult to know precisely what counts as full employment. Practical reasons make it difficult for every firm to operate at 100% capacity. Optimal capacity may considered to be 85%

When an economy achieves full employment,?

(a) the unemployment rate will be zero.
(b) frictional unemployment will be zero.
(c) the unemployment rate will equal the natural rate of unemployment.
(d) structural unemployment will be zero.

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