Classification of goods

Classification of goods

  

Free goods and economic goods

        Free goods are the gift of nature and these goods are unlimited in supply. Free goods are available in abundance and do not involve any cost of production. Therefore, we do not have to pay a price. Free goods have no opportunity cost. Examples are air, sunlight, river water, ice in Polar Regions… etc.

        Economic goods are limited in supply and these goods are man-made goods. These goods require cost of production and needs human effort to produce. Therefore we have to pay a price. Economic goods have opportunity cost. Examples are computer, books, pen, mobile phones…etc.

Consumer goods and capital goods

        Consumer goods are the goods used for our direct consumption. These goods are consumed for our own sake. Capital goods are used to produce consumer goods. The demand for consumer goods is direct demand. Examples are private car, Home furniture, mobile phones… etc.

        Producer goods are the goods used to produce other goods and services. These goods are not wanted for their own sake. Producer goods are also known as capital goods. The demand for capital goods is derived demand or indirect demand. Examples are machinery, office building …etc.

Durable consumer goods and non-durable consumer goods

        Durable consumer goods are the consumer goods which last for a long period of time. Examples include, Computer, TV...etc.

        Non-durable consumer goods are the consumer goods which do not last for a long period of time. These goods have a very short life. Examples include, foods, pencils...etc.

Merit goods and public goods

Merit goods are the goods the government considers every citizen ought to have. Government should play an important role in providing merit goods and services as these goods cannot be provided fairly by the private sector. Example: Education and health services.

Public goods are the goods consumption by one individual cannot be restricted by the consumption of another. It means these goods are non-exhaustible (non-rivalry) and non-excludable.  These goods are provided by government. Example: Street light, traffic lights, parks, roads, harbours...etc.

Economics definition by Lionel Robbins

Scarcity definition (Modern definition)

According to Lionel Robbins “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.

Here, ‘Ends’ means human wants.

Scarce’ means limited availability of resources.

‘Means’ means resources to satisfy human wants.

‘Alternative uses’ means some resources can be used for various purposes and activities.

Mixed Economy

                                      

A Mixed Economy is defined as a mixture of free Market Economy and Centrally-planned Economy. Both the private and public sector exist side by side for the betterment of the economy. This system comprises some important features of both Market Economy and Command Economy. The major problems of what, how and for whom to produce are decided by the price mechanism and the government. The examples of this system include Maldives, India and Singapore...etc.

Features of Mixed economy

1. Private and public ownership

In Mixed Economy, means of production are owned and controlled by both private individuals and the government. Private individuals have the right to own, control and dispose land, building and other economic resources. At the same time government also owns and controls economic resources.

2. Co-existence of public sector and private sector

The public sector and private sector work together for the development of the economy. A greater degree of freedom is provided to the private sector to operate and run its economic activities. At same time, government also carry out economic activities. But this system provides an adequate authority for the government to tackle and solve the economic problems

3. Price mechanism and government control

In this system, the prices of most of the goods and services are determined by the market forces of demand and supply. The government also interferes in the market to protect the interest of the public. The prices of some essential goods are fixed by government while the prices of some other essential goods are controlled by the government.

4. Existence of freedom of choice and centralised planning.

It allows freedom of choice for individuals. Individuals are free to set up their own businesses and run their own businesses according to their own will and ability. Workers are free to choose their occupations and consumers are free to spend their money as they wish.

Mean while, there is a central planning authority which fixes the targets of production and allocates the resources for public sector.

5. Presence of profit motive and welfare motive.

The main aim of the private sector is to maximize profit while the public sector works with the motive of maximizing public welfare.

Advantages of Mixed Economy

1. Existence of freedom of choice Mixed Economy provides freedom for the private individuals and firms to decide what is good for them. Consumers, workers and producers have high degree of freedom to choose between their choices.

2. Public goods and merit goods are provided by the government The hand of the government in economic activities makes it easy to provide public goods and merit goods fairly and equally. The private sector often fails to provide these goods for various reasons.

3. The existence of price mechanism encourages competition The competition between individuals and firms leads for efficient use of resources. Individuals have the desire to be better off. Firm they try every possible way to cope in the market. This increases both productive and allocative efficiency.

4. Incentive for innovation The profit motive increases the incentive to acquire or invent new ideas, new products, new techniques and new technology. This increases the efficiency of the firms and the economy as a whole.

5. Government interference stabilizes the economy Government role as an observer or supervisor of the economy is really crucial to make the important decision and to implement necessary measures to tackle the economic problems at the right time in the right way. This helps to stabilize the economy.

6. Welfare of the people is considered Government assists the poor people and other people in need through various means. The government may approach to assist through tax exemptions, rationing, pension, unemployment benefit...etc.

7. Government takes measures to reduce social costs and increase social benefit Government monitors the economy and encourages the private sector to carry out various economic activities by considering social costs and social benefits.

Disadvantages of Mixed Economy

1. Difficult to balance private sector with public sector When private sector and public sector work together simultaneously, there is the possibility that one sector may influence the operation of the other. Moreover, as the government is the regulatory body, government officials may misuse their power.

2. Excessive control by government Mixed economy system has a natural tendency to move further and further away from reliance on competitive market mechanism to greater and greater bureaucratic controls and interventions. This may discourage the private sector.

3. Imposition of taxes discourages private individuals and firms Existence of tax system reduces incentives to work hard. Tax on the income of the people discourages the workers to work hard and tax on profit of firms discourages the firms.

4. Increased Corruptions and bribery Corruptions and bribery are characterised in a mixed economy. It will reduce the efficiency of the economy.

Planned Economy

                                        

Command Economy is defined as an economic system where all or most of the means of productions are owned and controlled by government such that it makes all decisions regarding the production and distribution of goods and services. Command Economy is also referred as Centrally-Planned Economy, Planned Economy or Socialist Economy. In this system, government has complete control over the economy. In a command economy, resources are allocated by government through centralised planning. The major problems related to resource allocation are solved through government directive. The examples of Command Economy include North Korea and Cuba.

Features of Command Economy

1. Public ownership The most important feature of Command Economies is public ownership of the means of production. The land and other economic resources are owned by the state. Private ownership is limited to personal possessions.

2. Planned production Production is carried out according to a national plan. Resources are allocated through a planning process. The state makes a plan in which it sets target levels of output for all firms in the economy.

3. Fixed Prices In a centrally planned economy prices are not free to change in response to changes in supply and demand. In contrast, prices are fixed by the government. A shortage of goods will be solved by physical rationing.

4. Welfare motive The welfare of the community as a whole is the main aim of the government in a command economy.

Advantages of Command Economy

1.       More equal distribution of income and wealth The public ownership and control on the resources helps the government to distribute the benefits from these resources evenly and fairly between the citizens. This helps to eliminate poverty.

2.       Stability in the economy As production and distribution are carried out through centralized planning, the government takes the necessary corrective measures to solve the economic problems and stabilize the economy.

3. Provision of public goods and merit goods Unlike Market Economy, with the motive of maximizing public welfare, the government provides public goods and merit goods for its people. Moreover, these goods are provided equally and fairly to everyone.  

4.  Social costs and social benefits are considered The welfare motive of the government gives a great importance to reduce the social cost and achieve the maximum social benefit. The government only considers the benefit for the society rather than the benefit for one or few individuals.

Disadvantages of Command Economy

1. Loss of consumer sovereignty In Command Economy, less importance is given for consumer wants. The government control on production and distribution limits the choices for the consumers. The goods and services are not produced according to consumers’ tastes and preferences.

    

2. Lack of competition As all or most of the resources are controlled by the government, there is no competition between individuals and firms. Individuals do not compete each other for a better living status. Firms they work with the government’s aim of maximizing public welfare. Absence of competition will reduce the quality and efficiency of production and the performance of the economy as a whole.

3. Lack of innovation The absence of profit motive will limit the innovation. The firms feel it less important to acquire or invent new products, new ideas, new techniques and new technologies as they have no rivals to compete.

4. Inefficient resource allocation Lack of price system will lead shortage of some goods and surplus of others. Government decides the allocation of resources to produce goods and services, irrespective of consumer wants. Hence, resources may not be used for their best.

5. Individual freedom is restricted Economic agents involved should follow and obey the command or decisions of the government. Consumers do not have the freedom to choose between their wants. Workers do not have the freedom to bargain about their wages and salaries mean while they do not have the right choose or leave jobs any way they wish.

6. Rationing system creates wastage of time for consumers Subsidies on essential goods and services quickly lead to shortages. Therefore queuing is common in command economies. This wastes time in Long queues.

Market economy

Market Economy is an economic system where all or most of the resources are owned and controlled by private individuals such that market forces of supply & demand are used to allocate scarce resources between alternative uses. In this system, government plays a limited role. In Market Economy the problems related to resource allocation are solved through price mechanism. Market Economy is otherwise known as Free Enterprise Economy, Capitalist Economy or Laizzes-faire Economy. This is a system which provides considerable freedom for producers and consumers. But pure market system does not exist in the world. The closest examples of this system exist in USA and Japan.

Features of Market Economy

1. Private ownership All or most of the means of productions are owned and controlled by private individuals. Individuals have the right to own, control and dispose land, buildings, machinery and other economic resources.

2. Freedom of choice Firms are free to decide what and how they should produce goods and services. Workers are free to enter and leave occupations. Consumers are free to spend their income as they wish. Hence, it provides a considerable freedom for all economic agents.

3. Self-Interest This system encourages people to do what is best for them. Firms will try to maximise profits, workers will try to maximise their income, and consumers will try to maximise their satisfactions.

4. Price mechanism In a market economy all the economic decisions related to resources allocation are done through price mechanism. The interactions of demand and supply determine the prices of goods and services.

5. Limited role for the government A market economy is often described as a free enterprise economy, because it is free from government control. A government has very few economic roles in a market economy. The government interfere only to maintain law and order and to protect the country from internal and external affairs.

Advantages of Market Economy

1.  More freedom for economic agents As Market economy provides a considerable freedoms, the economic agents have each and every right to work hard for their betterment. Thus, this gives success for the economy as a whole. 

2. Competition leads to efficiency This system encourages competition between the firms and individuals. The incentive and efforts to win the competition increases the efficiency of firms and individuals.

3. Efficient resource allocation Since the resources are distributed by private individuals according to the market forces of demand and supply, the resource allocation is done efficiently based on the principle of economizing(making the most of) the limited resources.

4. Incentives for innovation The huge competition in this system encourages firms and individual to innovate new ideas, techniques and technologies in order to be in front or cope with the competition forwarded by rivals.   

5. Consumer sovereignty This system provides the maximum powers to the consumers. Thus, consumers are described as the ‘kings’ in market economic system. Hence, producers should consider the tastes and preferences of consumers in order to carry out profitable economic activities.

6. Small number of civil servants In market economic system, private individuals own and control all or most of the economic activities. Therefore the government does not have to employ a very large civil service and can reduce the expenditure on the salary of civil servants to enjoy a positive budget.

Disadvantages of Market economy

1. Inequalities of income and wealth As each and every individual in this system try to maximise the benefit for him/her self, income and wealth are distributed unequally. Inequalities in private ownership of factors of production create a wide gap between rich and poor.

2. Economic Instability Since there is no body to regulate the market economy, it is always subject to booms and depressions (ups and downs). It creates uncertainty about employment and business success.

3. Abuse of monopoly power In a market economy more successful firms may drive out the less successful ones. If private monopoly is created and one or few private firms become dominant in the market, there is the possibility of exploiting the consumers by charging higher prices.

4. Absence of welfare motive Profit motive is the guiding principle of market economy. It makes no provision for the unsuccessful or less fortunate in the market. Private Sector in most cases fails to work for the welfare of the society. Resources are diverted only for the profitable goods and services.

5. Encourage the consumption of harmful goods Free market may encourage the consumption of demerit goods like drugs and alcohol...etc. A large market for these harmful goods may be created as the government role in the economic activities is limited. Moreover, people become addicted to these goods and the high demand for these goods attracts a large supply of these goods.

6. It lacks provision of public goods and merit goods As the main motive of private sector is to maximize profit, it is not often possible for them to be engaged in any economic activity in which no or low price is charged. So, private sector in most cases fails to provide merit goods and public goods.

7. It ignores social cost in the society When economic agents try hard for their own benefit, in most cases they fail to consider social costs for the society. It ignores the social cost like air pollution, congestion and over-exploitation of non-renewable resources.