Business & Legal Environment

ByProf. (Dr.) Vijay Kr Khurana

What is Economic What is Economic System?System?

• An economic system or economy is a system designed by a nation to utilize her resources for the purpose of satisfying the needs & wants of the people

• W W Loucks – “An economic system consists of those institutions, organizations and policy mechanisms, which a nation has chosen, through which its resources are utilized for satisfaction of human wants

Why Economic Why Economic Systems?Systems?

• Players: Goal• Consumers: maximize personal utility• Businesses: maximize long-run profit• Government: maximize social welfare• Goals of different players in an economy differ.• This may result in improper allocation of resources and

national priorities may be ignored

Why Economic Systems?Why Economic Systems?• Nations use economic systems to determine how to Nations use economic systems to determine how to

use their limited resources effectively.use their limited resources effectively.• Primary goal of an economic system is to provide Primary goal of an economic system is to provide

people with a minimum standard of living, or quality of people with a minimum standard of living, or quality of life.life.

What are Characteristics What are Characteristics of Economic Systems?of Economic Systems?

• National / macro in characterNational / macro in character• Institutional Framework – variety of firms, organizations, households i.e. Institutional Framework – variety of firms, organizations, households i.e.

institutions make itinstitutions make it• Interdependence - different components / institutions do not work in Interdependence - different components / institutions do not work in

isolation, but they are interdependentisolation, but they are interdependent• Scarcity of resources – is the central problem most of the times Scarcity of resources – is the central problem most of the times • Need satisfaction – maximum welfare is the endNeed satisfaction – maximum welfare is the end• Dynamic – keeps on changingDynamic – keeps on changing• Complex – difficult to monitor, diagnose & effect changesComplex – difficult to monitor, diagnose & effect changes• Influenced by location specific & geographical factors Influenced by location specific & geographical factors • It may vary from one nation to another from small to large degreesIt may vary from one nation to another from small to large degrees

What are basic units of What are basic units of Economic Systems?Economic Systems?

• HouseholdsHouseholds• FirmFirm• Industry – is a group of firms tending to specialize in Industry – is a group of firms tending to specialize in

same transactions or series of transactionssame transactions or series of transactions• GovernmentGovernment

What are functions of What are functions of Economic Systems?Economic Systems?

1. How much should the economy produce?• It depends on the resources it has available

2. What should be produced?• Viz. USA economy is service & manufacturing

dominated

• Bangladesh economy is agriculture & manufacturing dominated

What are functions of Economic What are functions of Economic Systems?Systems?

3. How are the goods and services produced?

– By the most efficient companies. – Sometimes by the government.

4. Helps in planning for current needs & future needs

5. Facilities economic growth, increased productivity & improved standard of living

What are various types of What are various types of Economic Systems?Economic Systems?

Broadly Speaking – 3 types:

1. Capitalism / Free market Economy

2. Socialism

3. Mixed Economy

Capitalism• Capitalism is a economic system in which Capitalism is a economic system in which

private individuals own all materials means of private individuals own all materials means of production and all economic activities are production and all economic activities are undertaken for the purpose of profit undertaken for the purpose of profit

• It is an economic system where private It is an economic system where private businesses and consumers decide what they will businesses and consumers decide what they will produce and purchase and in what quantities.produce and purchase and in what quantities.

• Decisions are made according to law of supply & Decisions are made according to law of supply & demanddemand

• It was advocated by Adam Smith – 1776 – “The Wealth of Nations”

• It Maximizes liberty• Laissez-Faire – Anyone can go in any direction;

Govt generally does not interfere in the economy• Freedom to succeed and freedom to fail

Characteristics of Capitalism• Right to Private Property • Right to Inheritance • Private ownership of capital (means of production)• “Freedom of Enterprise” – everyone is free to pursue any economic

activity• Freedom of choice for Consumers • Profit is the motivator• Price Mechanism – Market forces of demand & supply determines the price• Competition is the regulator (not government)• Government does not interfere • Under pure capitalism, almost all goods would be provided by the private

sector (small government) – police, courts, military (even schools and the fire department could be private goods)

• Good of the individual is above society • Do not tax the rich more than the poor – no redistribution of income

Merits & Demerits of Capitalism

Advantages—Advantages—• Incentive for growthIncentive for growth

• Efficient utilization of resourcesEfficient utilization of resources• Rapid Economic GrowthRapid Economic Growth

• Encourages capital formationEncourages capital formation• Flexibility & Adaptability to changing situationsFlexibility & Adaptability to changing situations

• Democratic in natureDemocratic in nature• Encourages innovationEncourages innovation

Disadvantages—Disadvantages—• Concentration of economic powerConcentration of economic power

• Economic instabilityEconomic instability• Lack / gap of max social satisfaction at min social costs Lack / gap of max social satisfaction at min social costs

• Social wasteSocial waste• Rise of MonopolyRise of Monopoly

• Social discriminationSocial discrimination• Loss of human values Loss of human values

What is Socialism / Communism / Controlled

Economy ?• Socialism is an economic organization of a society in Socialism is an economic organization of a society in

which all material means of production are owned by the which all material means of production are owned by the whole community and operated by organs representative whole community and operated by organs representative of and responsible for the whole community according to of and responsible for the whole community according to a general economic plan and all members of community a general economic plan and all members of community are entitled to benefit from the results of such socialized are entitled to benefit from the results of such socialized production on the basis of equal rightproduction on the basis of equal right

• It is an economic system where the government (or It is an economic system where the government (or central authority) determines what, how, and for whom central authority) determines what, how, and for whom goods and services are produced.goods and services are produced.

What is Socialism / Communism / Controlled

Economy ?• It Maximizes Equality• It was advocated by Karl Marx – 1848 - “The

Communist Manifesto”• Industrial Revolution – Europe – horrible

working conditions - critique of capitalism1. View of History – class struggle

(bourgeoisie and proletariat)2. Labor Theory of Value – all value comes

from labor3. Nature of the State – the state

(government) always sides with the rich4. Dictatorship of the Proletariat – poor must

overthrow the government and set up a classless society

Characteristics of Socialism• State / Government (Public) ownership of the means of

production• Central Economic Planning• Focus on social welfare• Good of society is above the individual• Equality of Opportunity to one & all• “For each according to his ability, to each according to his need.” • Lots of government intervention in the economy to promote

equality• Classless society• Absence of competition• Workers run the factories – everyone earns an equal amount

Advantages & Disadvantages of Socialism

• Advantages --Advantages --– Social justiceSocial justice

– Economic stabilityEconomic stability– Rational Allocation of resourcesRational Allocation of resources

– Higher Economic GrowthHigher Economic Growth– Absence of Class StruggleAbsence of Class Struggle

– Guarantees equal standard of living for everyone Guarantees equal standard of living for everyone – Less crime and povertyLess crime and poverty

– Needs are provided for & through the governmentNeeds are provided for & through the government• Disadvantages --Disadvantages --

– Concentration of Economic Power in the hands of StateConcentration of Economic Power in the hands of State– Lack of incentive and initiative - No incentive to produce better product or Lack of incentive and initiative - No incentive to produce better product or

engage in entrepreneurshipengage in entrepreneurship– Loss of Consumer sovereignty - Minimal choices; Fewer choices of items Loss of Consumer sovereignty - Minimal choices; Fewer choices of items

– Loss of occupational freedomLoss of occupational freedom– Inefficiency & low productivityInefficiency & low productivity

– CorruptionCorruption

What is Mixed What is Mixed Economy ?Economy ? • It is an economic system which combines features of both It is an economic system which combines features of both

Capitalism & Socialism.Capitalism & Socialism.• Both Private Sector & Public Sector exist side by sideBoth Private Sector & Public Sector exist side by side• Both Government & Marketplace takes care of people’s wants.Both Government & Marketplace takes care of people’s wants.• Most nations have a mixed economy to varying degreesMost nations have a mixed economy to varying degrees:: India , India ,

United States, England, Australia United States, England, Australia

Characteristics of Mixed Characteristics of Mixed EconomyEconomy

• Co-existence of Public & Private Sectors Co-existence of Public & Private Sectors • Classification of Industries – Reserved , Open Classification of Industries – Reserved , Open • Economic Planning at Centre sets the directionEconomic Planning at Centre sets the direction• Price Mechanism – Partially free & Partially administered / Price Mechanism – Partially free & Partially administered /

regulated regulated • Profit motive cum social welfare motive Profit motive cum social welfare motive

Advantages & Advantages & Disadvantages of Mixed Disadvantages of Mixed

EconomyEconomyMerits—Merits—• Some needs and wants met in marketplace; Some needs and wants met in marketplace;

• and balance of needs and wants met by government and balance of needs and wants met by government • Good Individual freedomGood Individual freedom• Rapid economic growthRapid economic growth

• Social welfare Social welfare

Demerits—Demerits—• Economic instabilityEconomic instability• Lack of full freedomLack of full freedom

• Inefficiency Inefficiency • Lack of coordinationLack of coordination

• Citizens have to pay taxesCitizens have to pay taxes

An Old System – An Old System – Traditional EconomyTraditional Economy

• Found in rural, under-developed Found in rural, under-developed countries– countries– – VanuatuVanuatu– Pygmies of CongoPygmies of Congo– Eskimos tribes Eskimos tribes

• Customs govern the economic Customs govern the economic decisions that are made decisions that are made

• Farming, hunting and gathering Farming, hunting and gathering are done the same way as the are done the same way as the generation beforegeneration before

• Economic activities are centered Economic activities are centered around the family or ethnic unit around the family or ethnic unit

• Men and women are given Men and women are given different economic roles and different economic roles and tasks tasks

• Advantages: people have Advantages: people have specific roles; security in the specific roles; security in the way things are doneway things are done

• Disadvantages: Technology is Disadvantages: Technology is not used; difficult to improvenot used; difficult to improve