MBA SEM-1 Bussiness,S,Law U-II

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2 Business, Society and Law www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

3 We will Discuss Unit II: Economic System Economic System www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

Its all about Economy 4 Economic Economic System Environment Economic Conditions Economic Policies www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

5 WHAT IS AN ECONOMIC SYSTEM? An economic system is the socio-economic and political framework within which an economy functions. An economic system is the socio-economic and political framework ▪ What goods and services must to be produced and in what amount? ▪ How and where should the production be organized so as to produce these goods and services? ▪ Are the country's resources fully utilized? ▪ How to allocate the available resources among production units? www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

• By what methods and under what organizations are these goods being 6 produced? How should the resultant output be distributed? To whom and in what manner should the resultant output (goods) be distributed? How efficiently are the resources being used? Is the economic capacity to produce goods enough for the growth of the community? What proportion of the goods produced shall be capital goods and what proportion consumption goods? www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

7 Economic System The economic system that has been adopted in a country is basically influenced by the philosophy, history, aspirations and attitudes of its people and the system they want to put in place to translate these factors into realities and fulfil their chosen ideals and goals. The nature of an economic system relies on the agencies which are permitted to own and put to use the productive resources, extent of individual's initiative permitted in the economic activity, types of incentives offered to employees and the process of price determination. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

8 a Economic System Capitalist Socialist Mixed Economy www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

9 Capitalism: Adam Smith, the father of modern economics, who provided the justification and theoretical framework to it A free-enterprise economy is a feature of capitalism www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

10 Features of Capitalism (i) Privately owned property: Right to own, buy, sell, transfer any property which an individual has earn or inherited. The property can be used for production of goods and services and thus profit earned will be enjoyed by the person and his family. There are no legal bindings involved in it. It also has been proved that when Individual has complete charge of its property then they put more hard work and dedication to make it fruitful and gain good returns for the same. Alternatively, if property is owned by the state then the efficiency of individual contribution gets reduced and benefits are not completely enjoyed. The popularity of capitalism is because of this important feature where individual enjoys the property and after death that is passed to legal heirs. (ii) Liberty of enterprise: A very important aspect of Capitalist is Liberty. Entrepreneurs, group of owners are www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

11 Contd (ii) Liberty of enterprise: A very important aspect of Capitalist is Liberty. Entrepreneurs, group of owners are free to choose any business or industry and decide upon various factors of production. They can select any market for selling their goods and services. Owner and group of investors bear all the risk of uncertainty, liability for profit and loss. Employees and workers are free to select any industry or occupation for their livelihood. There are no formalities involved for business and employees for entry and exit from specific industry. Liberty is allowed till no harm is made to any society, group or state. Such economic system has very distinct industries from consumer and capital goods, services of different types, untapped and unfamiliar sectors, Technology oriented business, etc. Such factors are responsible for accelerated economic development and wide variety of industries. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

12 Contd (iii) Consumer’s Predominance: Consumer wish is the command for business. Consumer dominates the quality and quantity of goods produced. Consumer enjoys freedom of choice, saving or spending money. Even the prices of goods and services are dependent on the interactivity of consumer. Market system also influence the choice and selection of consumer, but consumer is the decision maker. Consumer predominance is based on following factors like level of earning, availability of choices for goods and services, limits placed on consumption but still consumer enjoys his dominance. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

13 Contd (v) Competition: Malpractices, unfair trade norms, unethical procedure can easily get submerged in Capitalist Industry structure. There is no government interference, no guideline to follow, no restriction to adhere to, no accountability for the society as it is opposite of what Capitalist structure is all about. It can also lead to emergence of monopoly and consolidation of power in hands of few. Still competition exist between large organizations. Competition is an important characteristic of the Capitalist, so government impose certain restriction to protect market from monopolies. For example, in US- The well-known capitalist economy of the World has file case against Microsoft to prevent market from its monopoly in software industry. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

14 Contd (vi) Price Mechanism: The demand and supply in the market determines the price of goods and services. If demand is more than supply, then price will increase and vice a versa. Enterprises that adapt to this system of market they make up normal profit while who do not adjust are wiped off the market. Market forces also decides the specific industry to develop more as compare to others, as small players will enter in sector that gives more profit. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

15 Contd (vii) Limited government interference: Government is assumed to collect taxes and not to interfere in the working of industries and markets. The Government should extend support to the enterprises. But now this view point is getting faded as there is increase in awareness that industrial growth should aid in society welfare. Now-a-days Government plays a role of savior that helps economic system in times of Depression, Recession, wars, etc. Countries like USA, UK, France, Netherland, Spain, Portugal, Australia etc. are known as capitalistic countries where government plays important contribution in economic development. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

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17 SOCIALIST ECONOMY: A socialistic economy is one where conscious and deliberate choice of economic priorities is made by some public authorities. • A central planning authority • State is the final arbiter of all issues • Pre-determined and well-defined • Public ownership of property • State is the only entrepreneur objectives • Resources distributed as per priorities • Fixation of targets • Administration of controls decided by the State • Growing role of the public sector • Prices determined by the State www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

18 SOCIALIST ECONOMY: (i) Collective Ownership of means of Production: All the factors of production are under the control of Government and it is meant to serve the objective of people welfare. The institution of private property is abolished and no individual is allowed to own any production unit and accumulate wealth and transfer it to their heirs. People have all the right to maintain consumer durable goods for their personal consumption. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

19 Contd… (ii) Social Welfare Objective: The main purpose of Government practicing such control over industry is to achieve social welfare and ensure equitable distribution of the profit earned by the economic activities. Demand and supply equation is not of much use in such approach. (iii) Central Planning: Resource allocation is based on the national priorities and proximity of resources. A central Planning authority is appointed to administer and implement the Economic planning. Government takes all economic decisions regarding production, consumption and investment keeping in mind the present and future needs. The planning authorities fix targets for various sectors and ensure efficient utilization of resources. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

20 Contd… (iv) Reduction in Inequalities: One of the important objectives of Socialist economy is to minimize the inequalities by eliminating the control of economic activities by group of wealthy people. It is important to note that perfect equality in income and wealth is neither desirable nor practicable. (v) No class conflict: As the Power and control of economic activities lies with the Government, there is no race or class-conflict arises because everyone has to follow the guidelines of the Government. All are co-workers. Socialism in today’s world Countries such as Russia, China and many eastern European countries are said to be socialist countries. As the global trade is the demand of an hour, many socialist countries are changing now and encouraging liberalization in their countries for their economic development. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

21 Mixed Economy: (i) Co-existence of public and private sectors: The industrial sectors are divided among public and private categories. Entrepreneurs, business families and large group of investors undertakes the production units of private sector and profit is their main objective. The public sector consists of production units owned by the government and works on the basis of social welfare. The areas of economic activities of each sector are generally demarcated. Government uses its various policies e.g. licensing policy, taxation policy, price policy, monetary policy and fiscal policy to control and regulate the private sector. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

22 Mixed Economy: (ii) Individual Freedom: Entrepreneurs or aspiring professional have all the right to select their type of business and earn good profit but at the same time they need to strategize the operation as per the Government guidelines. Government has enacted various Acts and laws to prevent the exploitation of labors, consumers, natural resource and market. For instance, government may put restrictions on the production and consumption of harmful goods. But within rules, regulations and restrictions imposed by the government, for the welfare of the society the private sector enjoys complete freedom. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

23 Mixed Economy: (iii) Economic Planning: Economic planning provides direction to the efforts of public as well as private sector. The production strategies, incentives, investment, availability of credit and so on factors provides support system to both public and private sector. Economic and National priorities especially that is overall concern with the welfare of society is the main motivation which highlights different priority is Planning. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

24 (iv) Price Mechanism: Price decides the profit margin as profit margin will ensure the survival of public and private sector. Prices are decided by considering the profit margins on one side and social objectives on the other. Prices play a significant role in the allocation of resources. But for some important commodities prices are maintained by the Government by offering subsidies. Thus, in a mixed economy people at large enjoy individual freedom and government support to protect the interests of weaker sections of the society. Indian economy is considered a mixed economy as it has well defined areas for functioning of public and private sectors and economic planning. Even countries such as USA, UK, etc. which were known as capitalistic countries are also called mixed economies now because of active role of their government in economic development. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

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