1.2 Economic systems

Economic and management systems

Grade 8

The economic cycle

Module 3

Economic systems

Assessment standard 1.3:

Economic systems

When you have completed this section, YOU WILL BE ABLE TO EXPLAIN HOW DIFFERENT ECONOMIC SYSTEMS ADDRESS THE ECONOMIC PROBLEM. (E.g. a planned, market-driven, mixed economy)

The central question that humankind has to solve in day-to-day living, is how to SATISFY THEIR NEEDS with the LIMITED MEANS available, i.e. how to apply the scarce resources to provide in as many as possible of the experienced needs. During this process answers must continually be found for the following:

WHAT must be produced?

HOW must it be produced?

FOR WHOM must it be produced?

As different countries (nations) differ from one another with regard to customs, tastes, culture and preferences, it is improbable that all nations will respond to these issues in a similar manner when using their resources for the satisfaction of their needs. Some nations, for instance, have a greater tendency towards sharing their possessions, to everybody’s advantage, while people in other nations may be more inclined to selfishly claim their “power” and “wealth” for themselves, with no regard for the rest. The way in which people think and behave will determine the answers to the above questions. This results in the development of a particular economic system that determines the nature of the economic process.

An ECONOMIC SYSTEM therefore involves institutions and/or rules that regulate the processes of production, consumption and distribution, as well as the development of characteristic features, that distinguish economic SYSTEMS from one another. To distinguish ECONOMIC SYSTEMS from one another, answers are required to the following questions:

How or by whom are decisions taken?

What is the spur or impetus that leads to decisions being taken?

How is the right of possession with regard to resources for production regulated?

How or by whom are the activities of producers and consumers regulated?

It is possible to distinguish between the following TWO economic systems by considering the above questions:

CAPITALISM / COMMUNISM

Activity 1:

Explain what you understand points A to D to mean with regard to the practical situation that results from the economic structure of a country.

In CAPTALISM, which is also known as the FREE MARKET SYSTEM, the emphasis is on private ownership of property, dependence on the functioning of the market mechanism (supply and demand), as well as the principle of own interest and the continuous pursuance of gain or profit. In COMMUNISM, or the CENTRALLY PLANNED/CENTRAL PLANNING SYSTEM, the emphasis is on state ownership of the means of production and dependence on the central plan of the government. The latter system is based on the idea that the interests of the community should have greater weight than those of the individual and that production and consumption should be geared towards equal distribution of goods rather than towards profit.

At this point it must be pointed out that there is no place in the world where either system is present in its “pure” form. In most countries, the economy is divided into two sectors, with some decisions being left to the market mechanism and others left in the hands of central planning. In this way, it is possible to get the best of both systems. When the two systems are used in conjunction in this way, we refer to a MIXED ECONOMIC SYSTEM. We also have a mixed economic system in South Africa, with certain economic functions being undertaken by private individuals (the private sector) and other functions being undertaken by the state (the public sector).

Activity 2:

MIXED ECONOMIC SYSTEM OF SOUTH AFRICA

Make use of the table below to indicate which of the given functions in the South African economy are provided by the private sector and which by the central authority. In each case also name the institution that provides the service.

[LO 1.3]

Assessment

Overview

Activity 1:capitalism / communism

Activity 2: mixed economic system of south africa