MODULE 2 - ECONOMIC SYSTEM AND FORMS The nature of an economy can be described in terms of the system of consumption, the

system of production, the system of distribution and the system of exchange transaction. For this purpose the economic system may be classification in terms of social-capitalist-mixed economy, barter-monetized economy, simple-complex economy, traditional-modern economy, dynamic-static economy, developedunderdeveloped economy, close-open economy. In case of Indian economic system, it is modern but highly complex, mixed, monetized, dynamic, underdeveloped and open. A. Free Market Economy or Capitalist Economy: In this form of economic organisation, firm motivated by the desire to maximize profits, buy inputs and produces and sells outputs. Household armed with their factor incomes, go to markets and determine the demand for commodities. The supply and demand of goods in the product and factor market and determination of the price and quantity of goods in the product and factor market is called free market economy. The market economy is also called capitalist economy because the price and quantity of goods in the factor market is dominated and determined normally by the capitalist or person who has/have capacity to purchase the factor goods and services at alternative price. In this economic system buyers and sellers are free to buy and sell their product at their choice in the market. Although there are administered price applicable on some goods and in some market, but normally it is free. Free market economy or capitalist economy is characterized by three fundamental features - free private enterprises, price system or market mechanism and profit motive. Free Market Enterprise: The market economy is characterized by economic liberty, i.e. right of

individual to own property. The property refers to the resource used in the production and services only; the property hold for personal use is not included under this characteristics. Freedom to own property is accompanied by freedom to use it. Freedom to use ones property implies freedom to earn an income form property. Freedom to earn income carries with the freedom to dispose of that income. Price System or Market Mechanism: In the free market economy or capitalist economy, the price is determined by the combined forces of capitalist; capitalist may be buyer, seller or both. They are free to decide the price of product, willing to buy and sell. Prices are determined by the unhindered operation of the forces of demand and supply, i.e. the relative pressure of buyers and sellers in the product market and factor market.

Profit Motive: Under this economic system the ultimate goal of firm is to earn maximum profit along with other subsidiary goal. Profit motive serve as an incentive to the people to put at the best. The maximization of profit is not possible by increasing the selling price of product and factor cost in the free market; because, in this system there are competitions. A firm can raise its profit by combined force such as reduction of the manufacturing cost, enhancing the production technology, proper utilization of human resource and other resources. B. Socialist Economy or Centrally Planned Economy or Command Economy: A mode of economic organization in which the key economic functions are determined by the government. In contrast to free market economic system, the planned economic system or socialist economic system is characterized by - social ownership of the means of production, central planning and social welfare objectives. Social Ownership of means of production: Under this system the means of production are own, controlled, allocated, directed and managed by the government/state. The state is authorized to control production and distribution. Under communism (the highest stage of socialism), the government control entire production and distribution system, and extend their control up to the individual consumption level. Central Planning: Under the command economic system the planning and budgeting of the state is centralized, the planning start from top and reach to the bottom of the economic system such as - from the national level to the regional level, to the local level, to the industry level, to the corporate level, to the individual level. Each unit of the economic system has to adjust individual activity as per the requirement of a national plan. Social Welfare: Social welfare constitutes the objective function of a centrally planned economy. In fact planning is a program of optimizing social welfare i.e. maximizing social welfare subject to the resource constraints. Social welfare depends upon the fair distribution of national wealth and income. Indian Economic System The Indian economy, which is fairly known as mixed economy system, because there are presence of the characteristics of free market economy as well as command economy. In the mixed economic system there are existence of the individual enterprises, individual price, individual profit, social ownership, social output, social welfare, central planning and state planning for the development of national economy, development of capitalist economy and development of social economic system and social welfare.

Q: Distinguish the characteristics of capitalist economy and command economy.