Economics / Notes Grade 11 Nkangala District/2023

NKANGALA DISTRICT

ECONOMICS NOTES

TOPIC 3: ECONOMIC SYSTEMS

GRADE: 11

YEAR: 2023

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 Economics / Notes Grade 11 Nkangala District/2023

TOPIC 3: ECONOMIC SYSTEM

 Economic system is the mechanisms followed in allocation of resources, production
and distribution of goods and services.
 Three types of economic systems are: market economy (capitalism), centrally planned
economy (socialism) and mixed economy.

3.1 THE MARKET ECONOMY/CAPITALISM

 It is the economic system that is based on private ownership and profit motive.
 It is also called capitalism.

CHARACTERISTICS
 Role of participants in the economy
 Households own factors of production.
 Producers hire the factors of production to produce goods and services
 The government does not interfere in the economy.
 Decentralised decision making
 Each consumer and producer are free to make consumption and production
decisions that suit them individually.
 Has element of self –interest
 Entrepreneurs are motivated by profit to participate in the economy.
 Consumers are motivated by aim of maximizing utility from goods and services.
 Price mechanism and prices
 Prices are set by the market forces of demand and supply.
 This include prices of goods and services as well as prices of factors of production.
 Where demand is higher than supply, prices often increase and where supply is
higher than demand, prices often decrease.

ADVANTAGES
 Efficiency
 Market system produces at the greatest efficiency.
 This is because of existence of competition, consumer complaints are dealt with
speedily and business managers are immediately aware of any problems.
 Competition encourages producers to produce good quality products at lower cost.
 Freedom of choice
 There is usually freedom to start any business, own property and write and say one ‘s
opinions.
 Owners of factors of production can decide how and when they want to participate in
the economy.
 They are free to decide how many factors of production they are prepared to make
available for employment.
 Consumers are free to choose the products they want to consume as long as they are
willing to pay the prices.

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 Economics / Notes Grade 11 Nkangala District/2023

 It is flexible
 Individuals can act immediately to benefit from profitable opportunities that arise e.g.
if one firm increases prices consumers can react by buying from another firm.
 If demand suddenly increases, producers can increase their supply of products.
 Profit motive
 Entrepreneurship is encouraged through profit motive.
 Businesses often produce goods and services that gives them high profit.
 Innovation
 People are encouraged to develop new products and processes and to introduce
them to consumers and businesses.
 Greater economic growth
 The market system can lead to high levels of economic growth.
 This is because businesses strive to increase production to gain maximum profits.
 There is no limitation to the amount of goods to be produced.
 Foreign capital flow easily to free enterprise economy where exchange rate and
price stability often prevail.

DISADVANTAGES
 Self-interest
 The profit motive leads to self-interest and lack of concern for those less fortunate.
 There are often wasteful uses of resources that leads to pollution and destructions of
the natural environment
 Duplication of many economic activities may lead to waste of resources and
consumer choice may be influenced by market distortions.
 Uneven distribution of income and wealth.
 In a market economy distribution of income and wealth is very uneven.
 There tends to be a few very wealthy people and large number of poor people.
 Market can be manipulated through large advertising campaigns.
 Market failure
 Market failure happens when the market fails to supply goods and services that are
needed at prices that can be afforded by poorer people.
 It is caused by breakdown in the price mechanism, for example when monopolies
have no competition, so they often charge higher prices.
 Factors of productions may not be fully utilized.
 Business cycles
 Market economy is subject to business cycle because the state does not control the
economy with its monetary and fiscal policies.
 During downswing, there are little or no growth with high unemployment.
 During upswings there are greater economic activity but with high inflation.
 Business cycle fluctuations can result in high inflations and high unemployment.

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 Economics / Notes Grade 11 Nkangala District/2023

3.2 THE CENTRALLY PLANNED ECONOMY

 It is an economic system in which a central authority, such as a government, makes
all economic decisions.
 It is also called the command economy or socialism.

CHARACTERISTICS
 Factors of production owned by government
 All factors of production, property and businesses are owned by the state.
 Factors of production are employed for the benefit of the society as a whole rather
than for private benefit.
 Government direct labour employment as it sees it fits.
 Collective economic goal
 All economic decisions taken by government are aimed benefiting the society in
general.
 Goods produced are those the government regard as suitable to increase the general
welfare of the society.
 No private initiative and limited choice
 Individuals have no freedom to decide how to participate in the economy
 There are very limited opportunities for consumers to choose what they want to
consume. This is because very few varieties of products are often available.
 Price mechanisms
 Prices are set by the government planning committee.
 the market forces of demand and supply do not function.
 Business cycles
 Business cycles do not exist as every economic activity happen as planned.
 The planning authorities provides communication between consumers and producers.

ADVANTAGES
 Equality of income
 workers are paid according to their needs, which gives and even distribution of
income
 No wastage caused by competition
 Competition often waste resources because of over-production
 In a centrally planned economy, this is reduced as there is no competition for supply
by other businesses.
 State entrepreneurship
 The state is the only entrepreneur and no private business is allowed to operate
which allows for effective planning for use of resources.
 Full employment
 The state employs all the people of working age and this raises the standard of living
if the whole population.

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 Economics / Notes Grade 11 Nkangala District/2023

 State planning and control

 The state plans all production and control sales of consumer goods in state-owned
shops leading to fairer prices and availability of goods.
 Government use advertising to educate people not to influence their consumption.
 Government services
 The state provides all the social services such as housing, education and healthcare.
 The infrastructure of transport, power and water is all state owned.

DISADVANTAGES
 Lack of motivation
 The workforce has little motivation to work hard or to be innovative as they cannot
earn greater wages for hard work or lose their jobs for slacking.
 Low economic growth
 Lack of motivation and innovation can result in low economic growth.
 This situation can be made even worse by poor planning by the government.
 Shortage of consumer goods
 Centrally planned economies usually focus on the production of capital goods, rather
than consumer goods, which lead to shortages and rationing.
 Lack of consumer choice and restricted freedom
 Consumer seldom have any choice of goods as there is no competition allowed for
the state enterprises.
 Freedom of movement and speech is often restricted.
 The state sets target for production and may use force to achieve them.

3.3 THE MIXED ECONOMY

 It is an economic system in which both individuals and government owns factors of
production.
 It combines the elements of market economy and command economy.
 South Africa is an example of mixed economic system.
 In reality there is no country that is purely market economy and purely command
economy, meaning all countries have some element of both government and
individuals participating in economic decision making.

CHARACTERISTICS OF SOUTHAFRICA’ MIXED ECONOMY

 Ownership of factors of production
 Individuals and businesses owns the majority of factors of production.
 Government owns some factors of production such as capital and land.
 Through the State Owned Enterprises, the state engages in production of goods and
services.
 The economy has a number of Private Public Partnership where the private sector
and government sector work together for profit and community development

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 Economics / Notes Grade 11 Nkangala District/2023

 Freedom of choice
 Economic participants have freedom to choose how they get involved in the
economy.
 Individuals can choose whether to provide labour or entrepreneurship.
 Consumers can choose the goods and services on which to spend their income.
 Government intervention
 Government intervene in the economy through laws e.g. law for encouraging
competition.
 This is done to improve the functioning of the economy and market system.
 Government intervention include measures such as setting minimum wages.
 One of the government ‘laws is the BBBEE which is aimed at increasing economic
participation
 Government as producer
 Government produce goods and services that the society consume as a collective
e.g. education, health services, roads.
 These goods are called public goods.

 Profit motive
 Entrepreneurs in the private sector are motivated by profit while government is
motivated by social development.

ADVANTAGES
 Greater stability
 Government involvement helps to bring economic stability as all participants follow
same regulations.
 Economic stability often leads to growth and increased employment.
 Freedom of choice
 Due to profit motive and high level of competition, private sector produce variety of
goods and services.
 These give consumers the freedom to buy goods and services they most desire.
 Competition also can result in lower prices.
 Improved social welfare
 The state provides goods and services such as law and order, education which the
society consume as a collective.
 It also may provide welfare services to redistribute income.
 Environmental protection
 Government can help to reduce externalities such as pollution through legislation.
 Ability to attract foreign investment
 Due the stability provided by government ‘s economic policies, foreign firms can find
the country attractive for investment.
 An additional factor for attracting foreign investment is the functioning of the market
system.

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 Economics / Notes Grade 11 Nkangala District/2023

DISADVANTAGES
 Socio economic problems still exist
 Despite all efforts, mixed economies still are unable to solve problems such as
unemployment and business cycles.
 Worker exploitation, whereby workers are very low wages still exist.
 Government spending can be too high
 In order to provide an improved social welfare for the poor, the government often
needs to spend a lot of money.
 Public services such as grants, free schooling, free electricity for the poor are costly
to the government.
 This may lead to an increase in taxation to increase government revenue.
 Private sector ideas may clash with government ideas
 While government often aim to achieve distribution of economic activities across the
country, businesses are only interested in investing in areas where they can make
high profit.
 This means often government want to develop rural areas, the private sector is
interested in doing business in urban area.
 Unfair market practices
 In an effort to make higher profits, businesses sometimes engage in unfair practices
such as collusion,
 State Owned Enterprises often are monopolies which are a disadvantage to the
economy. Monopolies reduces choices available to consumers as there is only one
product producer.

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Economics / Notes Grade 11 Nkangala District/2023

ESSAY: Compare and contrast South Africa’s mixed economy with the command economy

Mixed economy Command economy

Description  It is an economic system in which both individuals  It is an economic system in which a central authority,
and government owns factors of production. such as a government, makes all economic decisions.
 It combines the elements of market economy and
command economy

 Ownership of factors of production  Factors of production owned by government

 Individuals and businesses owns the majority of  All factors of production, property and businesses are
factors of production. owned by the state.
 Government owns some factors of production such  Factors of production are employed for the benefit of
as capital and land. the society as a whole rather than for private benefit.
 Through the State Owned Enterprises, the state  Government direct labour employment as it sees it fits.
engages in production of goods and services.
 The economy has a number of Private Public
Characteristics

Partnership where the private sector and

government sector work together for profit and
community development

 Freedom of choice  No private initiative and limited choice

 Economic participants have freedom to choose how  Individuals have no freedom to decide how to
they get involved in the economy. participate in the economy
 Individuals can choose whether to provide labour or  There are very limited opportunities for consumers to
entrepreneurship. choose what they want to consume.
 Consumers can choose the goods and services on  This is because very few varieties of products are often
which to spend their income. available.


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Economics / Notes Grade 11 Nkangala District/2023


 Government intervention  Price mechanisms
 Government intervene in the economy through laws  Prices are set by the government planning committee.
e.g. law for encouraging competition.  The market forces of demand and supply do not
 This is done to improve the functioning of the function.
economy and market system.
 Business cycles
 Government intervention include measures such as
setting minimum wages.  Business cycles do not exist as every economic
Characteristics

activity happen as planned.

 One of the government ‘laws is the BBBEE which is
aimed at increasing economic participation.  The planning authorities provides communication
between consumers and producers.
 Government as producer
 Government produce goods and services that the  Collective economic goal
society consume as a collective e.g. education,  All economic decisions taken by government are
health services, roads. aimed benefiting the society in general.
 These goods are called public goods.  Goods produced are those the government regard as
suitable to increase the general welfare of the society
 Profit motive
 Entrepreneurs in the private sector are motivated by
profit while government is motivated by social
development.

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Economics / Notes Grade 11 Nkangala District/2023

Advantages ADVANTAGES
 Greater stability  Equality of income
 Government involvement helps to bring economic  workers are paid according to their needs, which gives
stability as all participants follow same regulations. and even distribution of income
 Economic stability often leads to growth and  No wastage caused by competition
increased employment.  Competition often waste resources because of over-
Freedom of choice production
 Due to profit motive and high level of competition,  In a centrally planned economy, this is reduced as
private sector produce variety of goods and there is no competition for supply by other
services businesses.

Advantages

 These give consumers the freedom to buy goods State entrepreneurship

and services they most desire.  The state is the only entrepreneur and no private
 Competition also can result in lower prices. business is allowed to operate which allows for
effective planning for use of resources.
Improved social welfare
 The state provides goods and services such as law Full employment
and order, education which the society consume as  The state employs all the people of working age and
a collective. this raises the standard of living if the whole
 It also may provide welfare services to redistribute population.
income.
 Environmental protection  State planning and control
 Government can help to reduce externalities such  The state plans all production and control sales of
as pollution through legislation. consumer goods in state-owned shops leading to
fairer prices and availability of goods.
 Ability to attract foreign investment  Government use advertising to educate people not to
influence their consumption.
 Due the stability provided by government‘s
economic policies, foreign firms can find the country Government services
attractive for investment.  The state provides all the social services such as
 An additional factor for attracting foreign investment housing, education and healthcare.
is the functioning of the market system.  The infrastructure of transport, power and water is all
state.

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Economics / Notes Grade 11 Nkangala District/2023

DISADVANTAGES DISADVANTAGES
 Socio economic problems still exist  Lack of motivation
 Despite all efforts, mixed economies still are unable  The workforce has little motivation to work hard or to
to solve problems such as unemployment and be innovative as they cannot earn greater wages for
business cycles. hard work or lose their jobs for slacking.
 Worker exploitation, whereby workers are very low
 Low economic growth
wages still exist.
 Lack of motivation and innovation can result in low
 Government spending can be too high economic growth.
 In order to provide an improved social welfare for  This situation can be made even worse by poor
the poor, the government often needs to spend a lot planning by the government.
of money.
 Shortage of consumer goods
 Public services such as grants, free schooling, free
electricity for the poor are costly to the government.  Centrally planned economies usually focus on the
production of capital goods, rather than consumer
 This may lead to an increase in taxation to increase
Disadvantages

goods, which lead to shortages and rationing.

government revenue.
 Lack of consumer choice and restricted freedom
 Private sector ideas may clash with government  Consumer seldom have any choice of goods as there
ideas is no competition allowed for the state enterprises.
 While government often aim to achieve distribution  Freedom of movement and speech is often restricted.
of economic activities across the country,
 The state sets target for production and may use force
businesses are only interested in investing in areas
to achieve them.
where they can make high profit.
 This means often government want to develop rural
areas, the private sector is interested in doing
business in urban area.

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 Economics / Notes Grade 11 Nkangala District/2023

3.4 THE EFFICIENCY IN DELIVERYING SOCIO-ECONOMIC SERVICES

 Socio- economic services: it involves provision of goods and services to uplift the
society both economically (e.g. employment) and socially (e.g. living conditions).
 Examples of social services are education, health, housing, community amenities,
social security etc.
 South Africa ‘s social security system includes different kinds of grants namely:
 Child support: grant for helping raising a child.
 Foster care: grant paid to a custodian of an orphaned child, abused or abandoned
child.
 Disability: grant for people with mental or physical disability.
 Older persons grant: payable to people of 60 years and above.
 Public health is provided mostly by clinics, community centres and hospital.
 Education is another service on which the government spend a large amount of
money. However, the country experiences a decreasing learner enrolment and high
rate of school drop –out.

 Economic services are concerned with regulating and operating the economy more
efficiently.
 Government spend money on improving specific industries by subsidising research
and development.
 Spending on provision of infrastructure such as roads and communication is important
for the economic efficiency.
 Various economic policies are used by the government in order to improve the
efficiency of the economy, e.g. BBBEE.
 The relationship between social services and economic services is that social services
such as education and health are needed to achieve quality economic efficiency.

Evaluation of the efficiency of service delivery in South Africa.

Service delivery is successful (efficient) because:

 Basic education (Grades 0 -12) is provided for free to poor communities.
 Free basic health is available to all who use public health services.
 Various grants are provided to reduce the level of income inequality and poverty.
 Government has been providing free housing for poor households.
 Many rural areas have access to electricity
 Some rural areas have been provided with communal taps or boreholes that provides
clean water.

 Service delivery is unsuccessful (inefficient) because:

 The quality of basic education is low and provide school leavers with limited skills.
 The health facilities have limited equipment and medicines to provide efficient
services.
 Many people in urban areas live in shacks due to lack of housing.
 Many citizens receive no proper municipal services such as refuse removal; therefore,
they live in polluted environment.
 Roads are in poor conditions with potholes.
 Many rural areas still do not have access to clean water and sanitation.

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 Economics / Notes Grade 11 Nkangala District/2023

 There are still some rural areas without electricity.

3.5 INTERNATIONAL COMPETITIVENESS

 International competitiveness refers a country’s ability to be successful in

comparison to other countries.
 South Africa has advantage of having rich mineral resources, a diverse agricultural
sector and beautiful landscape popular with tourists.
 The country has strong research institutions such as South African Bureau of
Standard (SABS), Council for Scientific and Industrial Research (CSIR)
 Challenges facing South Africa in international competitiveness is that it relies too
much on exporting its minerals in its raw state. Raw minerals fetch lower prices
compared to finished products.
 South Africa also lack enough skill and technology to process the minerals before
exporting them.
 The low value of the rand against the US dollar is another challenge for the country
in international trade.

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