UNIT 2

The Basic Economic Problems and Economic Systems

2.1 The Basic Economic Problems: Scarcity, Choice, and Opportunity
Cost
1. Scarcity

 It is the fundamental economic problem that any human society faces.

 the demand for a good or service is greater than the availability of the
good or service
 All economic resources that a society wants to use to produce goods and
services are finite or limited in supply.
 The gap between limited resources and theoretically limitless wants.
 Reflects the imbalance between our wants and the means to satisfy
those wants.
 Scarcity is when the means to fulfill ends are limited and costly.
 is the foundation of the essential problem of economics:
 the allocation of limited means to fulfill unlimited wants and needs
 their being limited should be expressed in relation to human wants
 Means limitation of the availability of resources in relation to their wants.
 That means the available resources are not enough to completely satisfy
all the wants
 Scarcity always leads to choice,
 Scarcity of resources generates economic problems. If resources were
fully abundant, there would be no economic problems at all.
 their being limited should be expressed in relation to human wants
Note: Scarcity does not mean shortage. We have already said that a good is
said to be scarce if the amount available is less than the amount people wish
to have at zero price. But we say that there is shortage of goods and services
when people are unable to get the amount they want at the prevailing or on
going price. Shortage is a specific and short term problem but scarcity is a
universal and everlasting problem.
What Are the Main Causes of Scarcity?
The primary causes of economic scarcity are
1. Demand-induced- refers to when supply remains static and demand
grows
2. Supply-deduced- is when the supply of are source is below that of
demand,
3. Structural- structural is when a portion of a population does not have
the same access to resources as another portion of the population
Relative scarcity is when a resource is limited in supply, naturally.
However, relative scarcity also refers to supply in relation to demand. For
example, oil. Though
Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016
E.C Page 1
Absolute scarcity also refers to a resource being naturally limited but not in
relation to demand. The best example of this would be time. Twenty-four hours
in a day, seven days in a week, and 52 weeks in a year. Time is an absolute
scarcity,
Scarcity → limited resource → limited output →choice involves costs → opportunity
cost → we might not satisfy all our wants

2. Choice
Choice means selection of something for consumption or production.
 Every “choice” is accompanied by opportunity cost.
 If resources are scarce, then output will be limited. If output is limited, then we cannot
satisfy all of our wants. Thus, choice must be made. Due to the problem of scarcity,
individuals, firms and government are forced to choose as to what output to produce, in
what quantity, and what output not to produce.
 In short, scarcity implies choice. Choice, in turn, implies cost. That means whenever
choice is made, an alternative opportunity is sacrificed. This cost is known as opportunity
cost.
 Where there is scarcity, there is choice, and every choice has its opportunity cost.
 If there is no scarcity, there is no choice and no opportunity cost, i.e., free goods
3. Opportunity cost- choosing one option over another,
 is the amount or value of the next best alternative that must be sacrificed (forgone) in order
to obtain one more unit of a product
 is incurred when a business chooses one option over another
 is the benefit of the next best alternative sacrificed due to the current choice having been
made
 refers to what you have to give up to buy what you want in terms of other goods or
services.(የዕድል ዋጋ ከሌሎች እቃዎች ወይም አገልግሎቶች አንፃር የሚፈልጉትን ለመግዛት መተው ያለብዎትን
ያመለክታል)።
 When economists refer to the “opportunity cost” of a resource, they mean the value of the
next-highest-valued alternative use of that resource. If, for example, you spend time and
money going to a movie, you cannot spend that time at home reading a book, and you can’t
spend the money on something else.
 The PPF identifies the options when making a decision. When you decide on one action,
you lose the opportunity the other action provides
 The production possibilities curve illustrates the maximum possible output for two products
when there are limited resources. It also illustrates the opportunity cost of making decisions
about allocating resources.
 Businesses and economists use the PPF to consider possible production scenarios by
changing resource variables. The PPF allows businesses to learn how variables influence
production or decide which products to manufacture.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 2
  Economists can use it to learn how much of a specific good can be produced in a country
while not producing another good to analyze economic efficiency levels and growth.
Opportunity Cost = FO−CO

Where:
FO=Return on best forgone option (return on option not chosen)
CO=Return on chosen option (return on option chosen)
When we say opportunity cost, we mean that:
It is measured in goods & services but not in money costs
It should be in line with the principle of substitution.
 In conclusion, when opportunity cost of an activity increases people substitute other activities
in its place
 In effect, the cost of producing a quantity of a commodity is measured in
terms of the quantity of some other commodity that could have been
produced in its place.
 In short, opportunity cost comes into being due to the problem of scarcity of
resources and the fact that resources have alternative uses
4. The Production Possibilities Frontier(ppf)
 a graphical model that represents all of the different combinations of two goods that can be
produced
 is a curve, which shows the various possible combinations of goods and services that the
society can produce given its resources and technology

To draw the PPF/PPC we need the following assumptions (ግምቶች).

1.
The quantity and quality of economic resource available for use during the year is fixed.
2.
There are two broad classes of output to be produced over the year.
3.
The economy is operating at full employment and is achieving full production
4.
Technology does not change during the year.
5.
Some inputs are better adapted to the production of one good than to the production of the
other (specialization).
 Production efficiency(Economizing of Resources)
 the full employment of resources in production; efficient combinations of output will
always be on the PPC.
 Indicates the maximum level of output a manufacturer can produce without lowering the
output of another product.
 Means making the best use of available resources.
 it implies optimum utilization of existing resources
 Full utilization of available resources has taken place when no re-allocation
of resources for increasing the production of some goods can be made without
reducing the production of other goods

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 3
  Efficiency=Output Rate/Standard Output Rate×100

output
Productive Efficiency = ×100
input

 Resource allocation is the distribution of finite resources to specified purposes selected from
among several feasible possibilities.
 The PPF describes three important concepts:
i) The concepts of scarcity: - the society cannot have unlimited amount of outputs even if it employs
all of its resources and utilizes them in the best possible way.
ii) The concept of choice: - any movement along the curve indicates the change in choice.
iii) The concept of opportunity cost: - when the economy produces on the PPF, production of more of
one good requires sacrificing some of another product which is reflected by the downward sloping
PPF.
Related to the opportunity cost we have a law known as the law of increasing
opportunity cost. This law states that as we produce more and more of a product, the
opportunity cost per unit of the additional output increases. This makes the shape of the PPF
concave to the origin.

Suppose a hypothetical economy produces food and computer given its limited
resources and available technology (see Table 2.1).

Table 2.1: Alternative production possibilities of a certain nation

Types units Production possibility curves

of A B C D E
produc
t
food Metric
500 420 320 180 0
tone
comput number
0 500 1000 1500 2000
er
We can also display the above information with a graph as follows.

Figure 2.1 Production possibilities frontier/curve for Food and

Computer

 All points on the curve (A, B, C, D & E) are all attainable and efficient.
Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016
E.C Page 4
 Any point inside the curve (for example, point Q) is attainable but inefficient.
 Any point outside the curve (for example, point R) is unattainable.

EXAMPLE above graph

Referring to Table 2.1 above, if the economy is initially operating at point A, what is the
opportunity cost of producing one more unit of computer?

420−500 80
Moving from production alternative A to B, we have: OC= =- = 0.16
500−0 500

Δ y y 2− y 1
Moving from production alternative B to C, we have = =
Δ x x 2−x 1
320−420 −100 1
= = =0.2
1000−500 500 5

Δ y y 2− y 1
Moving from production alternative C to D, we have = =
Δ x x 2−x 1
180−320 −140 14
= = =0.28
1500−1000 500 50

Note: we take absolute value of opportunity cost as we are interested to interpret its magnitude.

5. The Production Possibilities Frontier (PPF)

 is also known as the substitution curve(Samuelson), production
indifference curve (Haberler) and transformation curve (Lerner)
 Is a graphical model that represents all of the different
combinations of two goods that can be produced
 is a curve, which shows the various possible combinations of
goods and services that the society can produce given its
resources and technology
 It is a simple device for depicting/showing/ all possible
combinations of two goods which a nation might produce with a
given resources.
 The slope of the curve at any point represents the ratio of the
marginal opportunity costs of the two commodities.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 5
  That is, the marginal opportunity cost of an extra unit of one
commodity is the necessary reduction in the output of the other.
 MOC is the cost resulted from producing one more unit of the
commodity

Assumption of PPF/C

 PPF is the curve that shows the best (maximum) combinations of two
outputs that an economy can produce given 5 assumptions:
1. The resources are given and remain constant.
2. The technology used in the production process remains constant.
3. The resources and technology are fully and efficiently utilized.
4. The technique of production remains constant.
5. With the help of given resources, only two goods can be produced;
 The PPF describes three important concepts:
 The concepts of scarcity: - the society cannot have unlimited
amount of outputs even if it employs all of its resources and
utilizes them in the best possible way.
 The concept of choice: - any movement along the curve
indicates the change in choice.
 The concept of opportunity cost: - when the economy
produces on the PPF, production of more of one good requires
sacrificing some of another product which is reflected by the
downward sloping PPF.
 the concept of economic growth
 Related to the opportunity cost we have a law known as the law of
increasing opportunity cost.
 This law states that as we produce more and more of a product,
the opportunity cost per unit of the additional output increases.
 This makes the shape of the PPF concave to the origin- when
opportunity cost is different
 Straight/linear lines-when opportunity cost is the same or
constant.

Combinations Butter Guns

A 100 0
B 80 1
C 60 2
Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016
E.C Page 6
 D 40 3
E 20 4
F 0 5

Alternative/Possibilities Quantity of schools Quantity of

airplanes
A 100 0
B 80 30
C 60 50
D 40 60
E 20 65
F 0 68
Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016
E.C Page 7
 Production Opportunity
Good X Good Y
Possibility cost of good X

A 0 100 –

B 2 90
?
C 4 60 ?
D 6 20 ?
a. At point B, Opportunity cost of Good X OCx=
90−100 −10
= =5
2−0 2
b. At point C, Opportunity cost of Good X
60−90 −30
OCx= 4−2 = 2 =|−15| =15

c. At point D, Opportunity cost of Good X

20−60 |−40|
OCx= = =|−20| ¿ 20
6−4 2
6. Economic Growth and the PPF

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 8
 The expansion (increase) of production possibilities and increase in the standard of
living is called economic growth.
 Economic growth, which is an increase in the total output level, occurs when one or
both of the following conditions/factors occur.

1. Technological change- is the development of new goods and of better ways of

producing goods and services.

2. Capital accumulation- is the growth of capital resources, which includes human

capital.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 9
 2.2 Central Problems of Economies
 Describe the basic economic problems.
 Explain how the basic economic problems affect individuals, firms,
and society
Basic Economic Questions
 Economic problems, which an economic system faces owing to
scarcity of resources, are known as basic economic problems.
These problems are common to all economic systems.
 They are also referred to as central problems of an economy.
 Consequently, every modern society should answer the following
three basic questions:
1. What goods and services are to be produced?
2. How to produce goods and services?
 For whom goods and services are to be produced?
Each of these basic questions is briefly discussed as follows.
 The fundamental economic problem results from the mismatch
between limited resources and unlimited wants.
 It is referred to as 'scarcity' by economists. Scarcity occurs when
society cannot fulfill all its wants because resources are limited.

 The fundamental economic problem results from the

mismatch between limited resources and unlimited wants.
 It is referred to as 'scarcity' by economists.
 Scarcity occurs when society cannot fulfill all its wants because
resources are limited.
1. What goods and services are to be produced?
 is also called the problem of the allocation of resources.
 It implies that every economy must decide on the type and
quantity of goods to be produced.
 The economy must make choices between the productions of:
 consumption and capital goods,
 civil and military goods, and
 Necessity and luxury goods.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 10
2. How to produce goods and services?
 is also referred to as the problem of choice of technique and
methods .
 Once an economy has reached a decision regarding the types of
goods and services to be produced, and has determined their
respective quantities, it must decide how to produce them, which
entails choosing between alternative methods or techniques of
production.
 The various techniques of production can be classified into two
groups:
1. Labour-intensive technique- involves the use of more labor,
relative to capital, per unit of output.
2. Capital-intensive technique- involves the use of more capital,
relative to labor, per unit of output.
 The choice between these techniques depends on the available
supplies of diverse production factors and their relative prices.
 Making a good choice is important for making the best possible
use of limited resources to produce the maximum number of
goods and services.

3. For whom are goods and services to be produced?

 This problem is also called the problem of the distribution of the

national product of a country. It relates to how a material product
is to be distributed among the different members of a society.
 The economy should decide, for instance, whether to produce for
the benefit of a few rich people or for the majority of poor people.
An economy that wants to produce for the benefit of the maximum
number of people would first try to focus on the production of
necessary goods for the whole population, and then on the
production of luxury goods.
 All these, and other fundamental economic problems, focus on
human needs and wants. Many human efforts in modern society
are directed towards the production of goods and services in order
to satisfy human needs and wants. These human efforts result in
economic activities that occur within the framework of an
economic system.
2.3 Economic Systems
 The way a society tries to answer the basic economic questions
mentioned above can be summarized by a concept known as the
“economic system.”
 is a set of organizational and institutional arrangements established
to answer the basic economic questions.
 An economic system is a means by which societies or governments
organize and distribute available resources, services, and goods
across a geographic region or country.
 Economic systems regulate the factors of production, including land,
capital, labor, and physical resources.
 Encompasses many institutions, agencies, entities, decision-making
processes, and patterns of consumption that comprise the economic
structure of a given community.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 11
1. Traditional Economy
A traditional economy is a system that relies on customs, history, and time-honored
beliefs.
 Tradition guides economic decisions such as production and
distribution.
Societies with traditional economies depend on agriculture,
fishing, hunting, gathering, or some combination of them.
 They use barter instead of money.
 Most traditional economies operate in emerging markets and
developing countries.
They are often in Africa, Asia, Latin America, and the Middle East.
 Traditional economies can also be found in pockets throughout the
world, even in developing countries.
Main features of Traditional Economy

 Traditional economies Centre on a family or tribe, and they use traditions gained
from the elders’ experiences to guide day-to-day life and economic decisions.
 A traditional economy exists in a hunter-gatherer and nomadic society:
 These societies cover vast areas to find enough food to support them.
 They follow the herds of animals that sustain them, migrating with the seasons.
 These nomadic hunter-gatherers compete with other groups for scarce natural
resources.
 There is little need for trade since they all consume and produce the same things.
 Most traditional economies produce only what they need. There is rarely a surplus
or leftovers. That makes it unnecessary to trade or create money.
 When traditional economies do trade, they rely on barter. It can only occur between
groups that do not compete. For example, a tribe that relies on hunting exchanges
food with a group that relies on fishing. Because they just trade meat for fish, there
is no need for cumbersome currency.
 They start to evolve once they start farming and settling down. They are more likely
to have a surplus, such as a bumper crop, that they use for trade. When that
happens, the groups create some form of money. That facilitates trading over long
distances.

Characteristics of Traditional Economy

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 12
Here are some key characteristics of traditional economics;
 Assumes rational behavior: Traditional economics assumes that individuals and
firms act rationally, meaning that they make decisions that are intended to
maximize their own self-interest.
 Emphasizes efficiency: Traditional economics places a strong emphasis on
efficiency, meaning that resources are used in the most effective way possible.
 Believes in Laissez-Faire: Traditional economics advocates for a laissez-faire
approach, meaning that the government should not interfere in the market and
should allow it to function freely.
 Focuses on Supply and Demand: Traditional economics focuses on the forces of
supply and demand, which determine the price and quantity of goods and services
in the market.
 Assumes stable prices: Traditional economics assumes that prices are stable over
time and are not affected by external factors.
 Believes in free trade: Traditional economics supports free trade, meaning that
countries should be able to trade freely with one another without interference.
Traditional economies typically develop as a result of local residents’ hunting and
fishing habits. They finally settle down and develop a society with a traditional
economic structure throughout time.
 Rely on activities: The local economy is supported on farming, fishing, and
hunting

2. Capitalistic Economy (Capitalism)

Meaning
Capitalism is:
 the socio-economic system where all property is privately owned,
 the social system based on the recognition and protection of
individual rights
 the oldest formal economic system in the world.
 It became widespread in the middle of the 19th century.
 all means production are privately owned, and production takes
place at the initiative of individual private entrepreneurs who work
mainly for private profit.
 Government intervention in the economy is minimal.
 In liberal market economies, capitalism is known as the
competitive market
 This system is also called free market economy or market
system or laissez faire.
 Laissez-faire capitalism means
 the systematic implementation of the principle underlying the
separation of economy and state—freedom.
 To be fully free, men must have the ability to guide and direct
their actions according to their own best judgment.
 Men must also have the ability and freedom to act on those
conclusions and the ability to acquire the means to do so.
 These freedoms recognize a man’s right to life—that is, his right to
take the actions required for the survival of a rational being.
 Capitalism begins with the individual as the primary unit of
political, social, and economic life.
 It recognizes that each individual has moral sovereignty over his
own life.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 13
  Each man must choose his own course of action

Main features of Capitalist Economy

a. The Right to Private Property:

 Individuals are free to own goods
 Capital assets—such as factories, mines, and railroads—can
be privately owned and controlled,
b. Freedom of Choice by Consumers
 Consumers can buy the goods and services that suit their
tastes and preferences.
 Producers produce goods in accordance with the demands of
consumers.
 This is called the principle of consumer sovereignty.
c. Competition:
 through firms’ freedom to enter and exit markets,
 maximizes social welfare, that is, the joint welfare of both
producers and consumers
d. Limited government involvement :
 The government does not interfere in day to-day economic
activities but confines itself to defense and the maintenance of
law and order.
e. Self-Interest፡ through which people act in pursuit of their own
good, without regard for sociopolitical pressure.
f. Price mechanism as a means of allocating resources: Under
capitalist economy all problems of what should be produced, how
to produce, for whom to produce are answered by the price
mechanisms.
g. Labour power is a commodity: In the capitalist system poor
people are deprived of all means of survival and they are forced to
sell their labour in the labour market in order to survive.
Capitalists tend to exploit these workers in order to maximize
profit.
h. Exploitation is dominant: The essence of capitalist profit
maximization is exploitation of labour power. Labour power is
exploited by paying labour low wages and by increasing working
hours.
i. Wastage of resources: Sometimes capitalists compete in the
use of resources and use a lot of money to try to win the market
through advertisement. These lead to overproduction, duplication
in the use of resources, fall in price and emergence of inefficient
monopolies.
j. Inequalities of Income: There is a wide economic gap between
the rich and the poor.
k. Existence of negative externalities: A negative externality is
the harm, cost, or inconvenience suffered by a third party because
of actions by others.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 14
Advantages of Capitalist Disadvantages of Capitalist
Economy Production
 Freedom of production and  Existence of classes: who own
consumption major means of production and
those who do not own means of
production
 Efficiency of production  Exploitation is dominant: Poor
through competition people are deprived of all means of
survival and are forced to sell their
labor power to the capitalists who
exploit them by paying very low
wages.
 Promote the right to private  Economic and social crises:
property affected by
 economic instabilities like inflation,
depression, overproduction,
unemployment etc.
 Freedom of ownership  Distortion in consumer choices:
 High private initiatives:  Too Much Waste:
 Proper resource allocation:  Unbalanced Economic Activity:
Price mechanism eliminates  Emphasis on Materialism:
possible mis-allocation of
resources
 Low burden to the
government:
3. Command or socialist economic system
 is a type of economic system in which all major means of
production are owned by the state and
 all decisions about what, how, how much, where and for whom to
produce are made by a central planning authority.
 Examples of countries, which practice this type of economic
system, include the former U.S.S.R, China, Cuba and North Korea.
Features of Socialist Economy
 A socialist economy has the following features:
1. Collective ownership: Under the command system major means of
production such as factories, banks, schools, hospitals, farms etc are
owned by the state.
2. All economic decisions are made by the state: Under the
command systems all economic decisions of what should be
produced, how to produce, for whom to produce are made by the
central planning authority-The government is responsible for
allocation of economic resources and distribution of wealth.
3. Exploitation is minimized and classes are non-existent: Under
the command system profit is shared equally among members of the
society and classes do not exist since the wealth of the society is
owned equally by all the members of the society and the motive of
production is not to maximize profit. Therefore, there is no need to
exploit workers by paying them low wages in order to make profit.
4. Lack of competition and low growth: Socialist production is
characterized by lack of competition and low growth of the economy.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 15
 This is because production is carried by few monopoly government
enterpriseswhich do not compete to maximize output and profit. This
renders them less efficient and generally leads to low growth of
socialist economy.
5. Lack of freedom of choice: In the command economy producers
are not free to decide on the allocation of scarce resources, what
should be produced is wholly determined by the state on behalf of all
the people, consumers likewise are not free to decide on what goods
to consume.
6. Equality exists among the members of the society: In the
command economy majority of the people have access to the
national output as the state insures equal distribution of wealth
among the citizens as a result every member of the society can
obtain a minimum standard of living. Even the poor member of the
society can still enjoy free social services that are provided freely by
the government.
7. Wasteful competition is avoided: In the command economy,
production is carried out by few government owned Enterprises.
These enterprises do not compete for allocation of resources because
their major motive is not to maximize profit; they produce to satisfy
the needs of the society. Due to lack of competition and proper
planning by the government the problem of misuse of resources is
often avoided.
8. Lack of political freedom: A command economy usually operates
under one party system. The party controls all socio-political and
economic matters of the country, all citizens regardless of their
differences in political opinions are forced to follow orders of the
socialist party and freedom of expression is largely restricted.
9. Bureaucracy in decision making and corruption: In the
command system, the process of decision making is centralized and
usually is made by a group of planners who undergo so many
processes of decision making by estimating needs of the society. This
process is very cumbersome since it involves so many procedures
and is time consuming. The planners in one way or other control
resources which make them liable for possible bribes from the
consumers who are forced to use bribe in order to get scarce but
essential commodities.

Advantages Disadvantages
Equality: equality exists among Lack of freedom of choice: the
the members of the society freedom of consumers and
everything is shared equally producers of hat to consume and
among members of the society. produce respectively are very
The government distributes wealth limited. The government decides
of the society or the national cake on behalf of all the people on what
equally to the citizens. should be produced and
consumed.
Lack of classes and exploitation: Low motivation for producing and
The major means of production are maximize profit: There is little
owned communally so there are no motivation for producing by
classes among the people in terms producers because the final output
of ownership of major means of does not directly benefit them.
production.
Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016
E.C Page 16
Promotion of majority welfare: the Inefficiency in production: This
government ensures achievement system is characterized by
of minimum inefficiency due to lack of
standard of living for every competition, low technology,
member of the society by using bureaucratic decisions, corruption,
different approaches like provision poor planning, too much
of free social services to all protectionism policy to domestic
members of the society. industries etc.
Wastage of resources is avoided: Lack of private initiatives: Public
proper planning in the allocation of ownership discourages individuals
resources is done to ensure to initiate various economic
efficient and full utilization of activities, innovate new methods of
resources and production production, take risks in production
according to the actual needs of etc.
the people.
Control of individual monopolies: Many officials of the government
The government controls are required to estimate wants and
emergence of monopoly firms direct resources: The use of such
which often cause hardships to officials may lead to bureaucracy,
consumers and society like excessive form filling, slowness in
environmental pollution, charging decision making and corruption.
extremely high prices and
production of substandard goods.
Economic and social crises can be Resource mismanagement due to
avoided: the government is able to poor allocation: Often the
control various macro-economic government in a socialist state
variables like money supply, uses a lot of resources to
investment, consumption, consolidate political power instead
expenditure, tax etc. In doing so, of directing such resources to the
economic crises such as deflation, production of economic goods.
recession, depression and Lags in implementation of plans:
unemployment can be avoided.
Slow investment and slow growth
of output per worker: This is due to
poor technological level caused by
lack of motivation in carrying out
some innovations among the
people. Individuals have narrow
chance
to participate in the investment
process since everything is
government centered.

Mixed Economic System

 It is the type of economic system, which has both the public and
private sectors existing and functioning side by side in various
economic activities.
Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016
E.C Page 17
  Due to the fact that no country in the real world is practicing
either pure capitalism or pure socialism, most economies are
mixed.
Features of Mixed Economic System
 The mixed economy has the following features:
 Ownership of resources: Under the mixed economic system some
economic resources are owned by the government while
individuals also own economic resources.
 Response to economic problems: Both the government and price
mechanism answer key economic problems about what should be
produced, how to produce and for whom to produce.
 Functions of the government in the mixed economy: In the mixed
economy the government has the following functions; regulation
of the economy, redistribution of wealth and investment in public
goods.
 Joint ventures exist in owning business firms: In the mixed
economy there are some firms which are owned jointly by the
government and individuals.
 The government helps weaker section of the society by providing
subsidies and free public goods.
Advantages of the Mixed Economy
 Mixed economy has the following advantages:
 Mixed economy corrects weaknesses of capitalist economic
system and socialist economy thus mixed economy provides
the best alternative system for a country which has failed to build
an effective capitalist or socialist system. For example, whenever
there is instability in the economy the government would
intervene in economic activities or control economic variables like
money supply, consumption, interest rates to solve problems like
inflation.
 Control of market failures. Since price mechanism cannot
efficiently provide public goods like education, health, road, law
and order, defense etc. The government in the mixed economic
system corrects this weakness of market mechanism by providing
public goods such as defense and security, education, roads etc.
 Control of inefficiency in production and wastage in
allocation of resources. Mixed economic system involves some
kind of planning. In this case, it can control wastage of resources,
by allowing private sector to enjoy some kind of economic
freedom in allocation of resources, by building an element of
competition which usually increases efficiency in production.
 Classes are minimized; unlike in capitalist economy, where
classes are inevitable, in mixed economy, classes are minimized
as the states take care of the underprivileged by redistributing
wealth in the economy.

Set by: Tr. Mamush K. Grade 9 Economics lesson note, 2016

E.C Page 18