Introduction to Economic System and its Relationship with Scarcity:
An economic system is the way a nation has organized its economic activities to solve the issue of scarcity and the basic economic problems of what to produce, how to produce and for whom to produce. Although every economy is faced with scarcity of resources, different economic systems develop and adopt different methods to overcome scarcity and maximize the economic welfare of the society. There are following two main types of economic systems are exists:
(1) Market Economy.
These are theoretical models. In reality, most economic systems are mixed economic systems, displaying some of the characteristics of both market and centrally planned economies.
Since the 1980s many former centrally planned economies have adopted a more market-oriented structure as a result of disappointing economic performance. These are known as emerging market economies.
Economic systems are distinguished from each other according to their methods of organizing economic activities, the extent of government intervention into the economy, the ownership of the factors of production or economic resources, and the means of allocating goods and services throughout the economy.
Why Scarcity is common to all Economic Systems?
Every economy faces the problem of scarcity of resources (factors of production). Despite the limited amounts of resources available, our wants are unlimited and so we must make a choice about which needs and wants will be satisfied and how we go about this. The methods of solving the basic economic problems create an economic system.
Every economic system attempts to operate on the production possibility frontier to maximize the output and welfare of the economy. Moreover, economic systems are attempting to extend the production possibility frontier in order to increase the welfare of the society. Any economic decision imposes an opportunity cost. Any attempt to produce more of one commodity can only be gained by producing less of another.
The choices that are made and how they are made is the essence that distinguishes economic systems. Economic decision-making attempts to promote economic welfare and wellbeing. How is this best achieved?
(i) Supporters of a market economic system believe it is best achieved by maximizing individual liberty and economic freedom. It is a system that emphasizes efficiency over equity and rewards individual effort.
(ii) Supporters of a centrally planned economy believe it is best achieved through the active economic intervention of the benevolent state. In the trade-off between efficiency of the system and equitable distribution and consumption of goods and services, equity prevails.
The choice of an economic system is as much political as economic. It is an expression of society’s values. Which system is better? The answer rests on your values and what you think is important.