Economic System

and Business

Definition

Anorganizedway in which a state or

nationallocatesitsresourcesand
apportionsgoods and servicesin the
nationalcommunity.

Basic units of Economic

System

Household

Firm

Industry

Government

Functions of an Economic
System

What to Produce

How to Produce

For whom to Produce

Choice between current needs and future needs

Economic growth

Types of Economic
System

Capitalism

Socialism

Mixed Economy

Types of Business
Environment

Internal Environment

External Environment

FREE
ENTERPRISE

FREE ENTERPRISE
CAPITALISM
FREE MARKETS

MONEY

Free enterprise is an economic system

that provides individuals, the opportunity
to make their own economic decisions,
free of government constraints, and as
private profit-potential business

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FREE ENTERPRISE Is
NOT Just materially fulfilling,
its a MORAL IMPERATIVE

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IS SOMETHING
THAT ENABLES US TO BE
FREE ENTERPRISE

TRULYHAPPY
IT MAKES US EARN

BUT ALSO
HELPS US EARN SUCCESS

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5 characteristics of Free
Enterprise
Private

property

Choice
Voluntary

Exchange

Competition
Economic

Incentive

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5 FREEDOMS OF FREE
ENTERPRISE

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Right to Private Property- ability to own your own land, thoughts,

and material items.

Open Opportunity- Anyone can take part in the market by free

choice. Ex. No one can tell you that you cant open a deli.

This creates a wide range of goods and services to choose from.

Forces all business to be productive and efficient.

Legal Equality- Everyone in the economy is protected by same

economic rights under law. Everyone has the right to succeed or
fail.

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Free Contract- People choose which agreements to enter
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in the market place
a mortgage

ex. Buying a house and agreeing to pay

Profit Motive- force that encourages people to improve their

wealth through economic activity

Ex. You decide to open a Sheetz on Route 30 to become

wealthier

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The circular flow of economic activity shows the

relationship between different economic groups.
Main Economic Groups:

businesses

government

households (1 or more people living together that

sell resources and buy goods and services)

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Advantages

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the market produces a wide variety of goods and

services to meet the consumer's wants

the free market responds quickly to people's wants

the market system encourages the use of new and

better methods and machines to produce goods and
services

Disadvantages

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factors of production will be employed if only it's profitable to do

so

the free market can fail to provide certain goods and services

the free market may encourage the consumption of harmful goods

the social effects of production may be ignored

the market system allocates more goods and services to those

consumers who have more money than others

SOCIALISTIC PATTERN

This figure illustrates the basic ideas of socialism. The government

(which is the people) owns the means of production. Through
centralized planning, it determines what should be produced then
dictates production quotas to the factories and workers. The goods
that are produced are owned by the government (which is the
people) and are then divided up among the workers.

KEY TENETS OF SOCIALISTIC

PATTERN OF SOCIETY

PUBLIC OR COLLECTIVE OWNERSHIP OF MEANS

OF PRODUCTION

CENTRAL PLANNING OF THE ECONOMY

EMPHASIS ON EQUALITY AND ECONOMIC

SECURITY

GOAL OF REDUCING CLASS DISTINCTIONS

SOCIALISTIC PATTERN IN
INDIA

Abolition of privy purse

a.

Privy purse???

Payment made to the royal families of erstwhile

princely states

b. It was a part of their agreements to first integrate

with India in 1947 and later to merge their states
in 1949 whereby they lost all ruling rights.
c. For the 565 princely states, Privy Purses ranged
from Rs. 5000/- per annum to amounts in millions
d. And 6 of the most important states in India were
provided with Privy Purses above Rs. 10,00,000/e. Those 6 states were- hyderabad, mysore,
travancore, baroda, jaipur and patiala

Bank Nationalization

the process of taking an industry or assets

into the public ownership of a national
government or state

usually refers to private assets, but may

also mean assets owned by lower levels of
government, such as municipalities, being
transferred to the public sector

Many socialists believe that public

ownership enables people to exercise full
democratic control over the means
whereby they earn their living

and provides an effective means of distributing

output to benefit the public at large, and a
means for providing public finance

The need of nationalizing the bank in India was

felt because the private commercial banks were
not fulfilling the social and developmental goals
of banking

Despite the enactment of the banking regulation

act 1949 and the nationalization of the state
bank of India in 1955, the expansion of
commercial banking had largely excluded rural
areas and small-scale borrowers

Then the nationalization took place in two

phases:

First round- in 1969 covering 14 banks

Second round- in 1980 covering 7 banks

Currently there are 27 nationalized

commercial banks

At the time of nationalization, priority sector

concept introduced by bringing agriculture,
small-scale industry, retail trade, small business
and small transport operators under its fold

It became mandatory for banks to provide 40%

of their net credit to priority sectors

Within this bank had to provide 18 percent of

their net credit to the agricultural sectors, so as
to reduce the hold of moneylenders & make
more funds available for agricultural
development

So, from the early 1970s, banks were also

actively involved in poverty alleviation and
employment generation programmes

Anti-competition law

Also known as monopolies and restrictive trade

practice act (MRTP Act)

First legislation act in 1969

It was an integral part of the economic life of the
country
It aims at preventing concentration of economic
power to the common detriment, provide for control
of monopolies and probation of monopolistic,
restrictive and unfair trade practice, and protect
consumer interest
enacted to ensure that operation of economic system
does not result in concentration of economic powers
in hand of few

Directive principles of
state policy

Article 38: state to secure a social order

for the promotion of welfare of the people

Article 39: certain principles of state

policy to be followed by the state

SOCIALISM- AN ILLUSION

MIXED
ECONOMY

TO BE COVERED.

Features

Merits of a Mixed Economy

Demerits of a Mixed Economy

Planning in a Mixed Economy

FEATURES

Co-existence of Public and Private sectors

Classification of Industries

Role of Price structure and Government directives

Govt. regulation and control of Private Sector

Consumers sovereignty is protected

Govt. protection of Labor

Reduction of Economic Inequalities

Control of Monopoly

MERITS OF A MIXED
ECONOMY

Individual freedom

Modern Technology

Best allocation of resources

Rapid economic growth

DEMERITS OF A MIXED
ECONOMY

Low inflow of Foreign Capital

Inefficiency of Public sector

Maximum control on private sector

Fear of Nationalization

Problem of Concentration on Economic

Power

Presence of imbalance in the Economy

PLANNING IN A MIXED
ECONOMY
Success depends on

Public sector-Ability to
pursue social goals.

State- guiding Private sector.

States ability to check

distortions in investment
decisions-private sector going
against public sector.

Distortions

Inequalities in income and

wealth.

Unemployment due to rise in

population.

Emergence of black Economy

No proper redistribution of
wealth in spite of rise in
national productivity.

Trends in Public Sector

Organization owned by public sectors including

central, state or local authorities to the extent
of 50% or more

Top managerial control owned by public

authorities

For the achievement of a definite set of public

purpose

Public Sector
Objectives
Acceleration of economic growth
Control on natural monopoly
Earn return on investment and
redistribution of income and wealth
Gain control over the commanding
heights
Ensure stability in pricing of key
products and commodities

Public Sector
Role in Indian economy

One fourth of countries gdp

6% total employment in the organized sector

20% direct and indirect tax collection

One third of the exports

Capital formation

Employment generation

Private sectors

The industrial policy 1956 restrictive in nature

for setup of new private industries which was
modified in 1991

Adopted policy of planned disinvestment

Dilution of the stake of government ownership

of 51%

Has an history of only 20 years

Private Sector
Need for privatization

Lack of competition

Long gestation period

Inefficient management

Opening up for foreign investments

Joint Sector

Its an extension of the concept of mixed

economy.

Advocating government participation in the

equity capital of private sector enterprises
promote industrial growth.