Explain the economic system

An economic system is the organised arrangement by which a society uses its scarce resources (land, labour, capital, enterprise) to answer the basic questions: what to produce, how to produce, and for whom to produce. It sets the rules of ownership, production, exchange and distribution.

Types of economic system

1. Capitalistic (market) economy

• Private ownership of the means of production; freedom of enterprise and choice.
• Profit motive, competition, and price mechanism (demand and supply) allocate resources.
• Merits: efficiency, innovation, consumer choice. Demerits: inequality, monopoly, neglect of public needs.

2. Socialistic (planned) economy

• State owns and controls the main resources; a central planning authority takes decisions.
• Aim is social welfare, equal distribution and full employment.
• Merits: equity and planned growth. Demerits: low incentive and efficiency, little choice.

3. Mixed economy

• Private and public sectors work together; the government regulates and runs strategic industries while private enterprise exists. Nepal, India and most countries follow this.

Importance for engineers

The system decides the demand, prices, taxes and policy under which a project is evaluated; for example, public projects in a mixed economy are judged by benefit-cost analysis while private ones are judged by profit.