Types of Economies

Agenda• Production possibility frontier• What is mixed economy?• What is central economy?• What is positive and normative

economics?

Production possibility frontier

• A graph showing all the possible outputs of two goods when using the resources available with 100% efficiency

• It assumes that:

Full employment Fixed technology

Fixed resources Two goods

E.g. Guns Vs. Bread production

What is mixed economy? (ME)

Capitalism SocialismMixed

Economy

Market Economy

Planned Economy

Mixed Economy

Demand & Supply Centralised authority (Fluctuating prices) (Fixed prices)

So .. We can say that:

• Most ME are called market economy with strong regulatory supervision

• ME does not block private sector from profit seeking but do monitor profit levels and nationalise companies that are deemed to go against public good.

• In ME, Governments may seek redistribution of wealth by taxing the private sector and use those taxes for social objectives

• Unlike capitalism and socialism, ME allows some prices to fluctuate according to demand, while others fixed( Eg. Energy)

Who owns what?

Heavy industries & Strategic sectors“Government”

Banking

Transport

Energy

Other“Private sector”

Agriculture

Consumer goods

Other industries

Merits of ME

•Combining advantages of socialism and capitalism and overcoming their disadvantages•Proper allocation of resources•Protecting the economy•Free Enterprise (i.e. Economic development)•Benefits of taxes for social programs

But any drawbacks?• Conflict between private and public

sector• Poor performance of public sector• Over regulations can paralyze the

production process• It does not attain very high economic

growth rate

Central Problems of an Economy

• What to produce and how much?– Resources are scarce and wants are abundant

• What is relative scarcity and relative abundance?– Normatively, decisions should be driven by what provides

most satisfaction• What actually drives ‘producer’ decisions in an economy?

• How to produce?– Resource allocation that minimizes resource input– Production technique (labor or capital intensive)

• For whom to produce?– Distribution of goods > purchasing power > income levels of

factors of production– Income > rent, wages, interest and profits

Centrally Planned Economy• Ownership of means of production

– Controlled – Land, manmade and natural resources are owned by the State

• Motive – Social welfare guides production of goods

• Solution to central problems– Economic planning (done centrally by the government) will

solve the key economic problems

• Freedom– Loss of consumer sovereignty– Loss of choice of occupation

Positive economics

• Positive economic analysis deals with things as they are-”actuals”.

• It studies cause and effect relationship.

• It remains strictly neutral.• Regards ends and does not make

value judgments.

Few examples of positive economic analysis are:• A rise in the price of wine leads to a fall in its quantity demanded.• A rise in the price of television leads to a decrease in the quantity of television supplied.• An increase in rate of interest discourages the demand for loans.

Normative economics

• Normative economic analysis deals with things as they ought to be i.e., ideals.

• It passes moral judgments.• It is not neutral about ends.• It expresses its opinion about the

rightness or wrongness of an economic action.

Few examples of normative economic analysis are:

• A rise in the price of food grains will hit the poor very badly.• The fair rate of interest is 6%.• Standard wage rate should be Rs 150 per day per person.

Thus, to conclude :• Positive economics is objective and

fact based while normative economics is subjective and value based.

• Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved.

• Normative economic statements are opinion based, so they cannot be proved or disproved.

Thank you =)