MBA 1st Year Economic System Study Material Notes
MBA 1st Year Economic System Study Material Notes: In this post, we will learn about MBA 1st Year Economic System Study Material Notes. In MBA1st Year there is one of the most important questions comes from Economic System. You will learn about MBA 1st Year Economic System Study Material Notes. MBA is a process of development.
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Meaning of Economic System
An economic system is a system designed by a nation to utilize its resources for the purpose of satisfying the needs and wants of people. (MBA 1st Year Economic System Study Material Notes)
“An economic system consists of those institutions which a given nation or group of nations has chosen or accepted as the means through which their resources are utilized for the satisfaction of human wants”.
An economic system comprises all the institutions, organizations, and policy mechanisms by which the people of a country manage and utilize the country’s resources to obtain the things they need. It is the network of economic relationships in the society arising from the organization and/or mode of production, distribution, consumption, and exchange. The economic system embodies the nature of property rights, ownership of resources, market mechanism, the role of the state, etc.
Basic Constituents of an Economic System: An economic system consists of several entities, one of which is given below:
1. Household: The simplest but the most significant unit is the household which means all the persons living together as one family. The ultimate purpose of all economic activities is the satisfaction of household needs and wants. Every household has limited means but multiple needs. This gives rise to the problem of the allocation of scarce resources. For example, a household has to decide whether to buy a car or to send the child abroad for higher education. In the same manner, a household has to decide what part of the family income to consume and what part to save, (MBA 1st Year Economic System Study Material Notes)
2. Firm: A firm is a unit of ownership, management, and control. It is a business unit that owns and controls one or more factories/branches/offices and is engaged in the production and/or distribution of some product or service. A firm is that unit of the economic system which performs some Industrial or commercial activity. While the household represents the demand side, firms represent the supply side of the economy. The person who launches a firm is called an entrepreneur.
The entrepreneur takes decisions relating to the size of the firm, location of plant/office, nature and quality of the product to be manufactured, the factors of production to be employed, fixation of price, sales promotion, distribution channel, source of finance, etc.
3. Industry: Industry means all the firms producing the same or similar products. According to E.S. Florence, An industry is a group of firms tending to specialize in the same transactions or series of transactions. A firm is a single unit of production whereas an industry comprises all the firms producing the same type of product. For example, Maruti Undying is a firm while all the firms producing cars constitute the car industry. (MBA 1st Year Economic System Study Material Notes)
4. Government: Government consists of all public agencies, State bodies, and other units which govern the country. In India, there are two types of governments:
(a) Central Government, and (b) State Government.
Each type of Government maintains law and order and provides public services (for example, education, health, water, electricity, telephone, public transport, etc.). In addition, there are government or public enterprises (for example, Indian Oil Corporation, State Bank of India, Steel Authority of India) which are engaged in the production and supply of certain commodities or services. As a political entity, the government is empowered to create laws for regulating business.
Characteristics of an Economic System
Economic systems differ from country to country according to the nature of economic institutions which a country chooses for the satisfaction of people’s wants. However, all economic systems are characterized by the following features:
1. National Entity: An economic system always covers the entire country. However, more than one country may adopt the same type of economic system. (MBA 1st Year Economic System Study Material Notes)
2. Institutional: An economic system comprises various institutions that a nation has devised and adopted for satisfying the needs of its people. Households, firms, industries, government, price mechanisms, and economic planning are examples of such institutions.
3. Interdependence: The different institutions of an economic system do not work in isolation from one another, rather they are interdependent and interacting. Therefore, proper balance and coordination between them are necessary for the smooth functioning of the economic system. (MBA 1st Year Economic System Study Material Notes)
4. Scarcity of Resources: Every economic system has limited resources at its disposal in comparison with the demand for these resources. (MBA 1st Year Economic System Study Material Notes)
5. Need Satisfaction: All the activities of an economic system are undertaken for the satisfaction of human wants which are unlimited.
6. Dynamic: An economic system is dynamic rather than a static organization. It is made up of man-made institutions. These institutions are created, destroyed, and modified as per the needs of the people. Some economic systems change slowly while others change fast. For example, the Indian economic system changed very little during 1947-1990. But since 1991, there have been rapid changes in it. (MBA 1st Year Economic System Study Material Notes)
Functions of an Economic System
The basic function of an economic system is to ensure maximum possible satisfaction for the people of the country. For this purpose, the scarce resources of the nation have to be allocated and utilized toward unlimited wants. The economic system has to tackle the following central problems:
1. What to Produce: An economy has first of all to decide the goods and services that are to be produced. The nature and amount of goods to be produced are decided to keep in view the requirements of people and the availability of resources. A choice has also to be made between consumer goods and capital goods. If the amount of one type of goods is increased, the quantity of the other type may have to be reduced due to the scarcity of resources. (MBA 1st Year Economic System Study Material Notes)
2. How to Produce: The second fundamental problem is to decide the mode of production. Choice of suitable techniques of production is important because it affects the efficiency in the use of resources and the mix of factors of production. For example, in a heavily populated country like India, the highly capital-intensive techniques of production in all areas may result in scarcity of capital and widespread employment. (MBA 1st Year Economic System Study Material Notes)
3. For Whom to Produce: This problem is concerned with the distribution of total output among the people. An economic system is expected to satisfy the needs of all sections of society. However, in a capitalist economy, goods are produced for those who can afford to buy them. On the other hand, in a communist system, the state ensures that goods are produced and distributed for all types of people. (MBA 1st Year Economic System Study Material Notes)
4. Choice between Current Needs and Future Needs: Some wants are urgent and must be satisfied immediately. Other wants are however not urgent and can be postponed for the future. A rational allocation of resources is needed between the present needs and future needs. The economic system must also preserve the environment from all types of pollution so as to serve the interests of both the present and future generations. (MBA 1st Year Economic System Study Material Notes)
5. Economic Growth: In order to increase productivity and improve the living standards of people, it is necessary to discover and utilize new resources in addition to better utilization of the existing resources.