Reading the economy and economic systems

The word “economy” is a word we hear or read almost every day. For example, we may be told that “the world economy is in the doldrums”, or “the European economy is making little progress”, or “the Russian economy is beginning to recover”.

But what is meant by the economy? What is an economy? How does an economy work? The economy is a social mechanism which answers these three questions. The economy means a system for the management, use and control of the money, goods and other resources of a country, community or household. In other words an economic system is the method society uses to allocate its resources (land, labour, capital and entrepreneurship) to satisfy its needs.

The degree of economic development of the country is determined by the level and character of production forces and production relations. Due to public labour division the economy of a society it subdivided into separate branches, industrial complexes, economic regions and production infrastructure.

What distinguishes one economic system from another is the control of the factor of production and the interaction of business, government and consumers. In the modern world there are three main types of economic system: capitalism (or pure capitalism), mixed capitalism and communism (socialism).

Capitalism (of pure capitalism, or a market economy), as it was originally described by Adam Smith in his eighteenth- century book “Wealth of Nations“, is an economic system where the factors of production are in private hands and economic decision are made freely according to the market forces of supply and demand. In this system the economic questions of

-What is to be produced?

-How much will be produced? Who will produce it?

-How much will it cost? Who will get it?

are determined by the consumers in the marketplace.

In pure capitalism industry and individuals use resources as they choose. The government takes a hands- off approach and does not interfere in the economic system. Producers and consumers pursue their own self- interests. Producers make as much as they can sell and consumers buy as much as they can afford.

In this system each person behaves in the best interests of society, as if guided by an invisible hand. The marketplace is regulated by the interaction of the buyers and producers. If a company produces a defective product or charges too much for the product it is rejected by consumers. As a result, the producer has to improve the quality of the product or reduce the price to make any sales. The market place, in essence the invisible hand, regulates economic conduct. Government does not have to do any regulating.

Comprehension check

I. Did you find any proofs for the questions before the text? Now try to give more detailed answers.

II. Answer the following questions.

1. What is an economic system?

2. What distinguishes an economic system from another one?

3. What types of economic system do you know?

4. In whose hands are the factors of production in capitalism?

5. Who makes economic decisions under capitalism? Does the marketplace have influence on them?

6. Whose interests do producers and consumers pursue in the market?

7. If a company produces a defective product, will it be sold or rejected by consumers? What do you think of it?

8. Are you for or against the government’s regulating of economic conduct in Russia?

III. Complete the sentences.

1. The method society uses to allocate resources is called…

2. The resources of society include…

3. The main difference among economic systems is…

4. Three main types of economic systems are…

5. Adam Smith was the first to…

6. Market forces of supply and demand are basic in… economy.

7. The government takes…approach and… in the economic system.

8. Consumers reject the product which is…or costs…

9. The economic conduct is regulated by… but not by…