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Advantages and disadvantages of the different economic types

What is economics? Economics is the study of the forces of supply and the demands allocate deficient resources. Economics is divided into microeconomics and macroeconomics. Microeconomics is something doing with the behavior of firms, consumers, and also about the role played by the government. Macroeconomics is more to inflation, industrial production, unemployment and the role played by the government. Microeconomics is the study about the behavior of small economics unit, for an example, individual consumers or households. Microeconomics is behavior of individual units. Microeconomics main concern is about the factors that affects an individual economics choice.
Other than that, economics also can be said as branch of social science that can read the production distribution and the consumption of goods and service. Economics also include scarcity, choice, households, goods and productions as a definition. Economics system are studies of the method and institution where societies determine about the ownership, direction and allocation of economics. There are three types of economics system;
Socialist system is a system that can be defined as a centrally planned or can be said as command economics. This system is fully controlled by the government. All the choice about resources are all made by the government.
Capitalist system means free market economics. This system is like a freedom economy. This is because of the decisions made by the people. This system is mainly about the people in the country.
Mixed economy
Mixed economy is an economy based on the free enterprise principle. There is still some form of direct intervention and it is controlled by the government.
Mixed economy can be said as a form of organization where both capitalist economy and socialist economy are found. In mixed economy there is the presence of private economic freedom with centralized planning and the common goal of avoiding the problems which comes because of capitalism and socialism. In the mixed economy system the main authorization of the economic activities are mainly by the government’s regulation and the licensing policies. For an example, if someone wants to open a business, they must register and take license from the government for that particular business. So in this way, the government becomes a big power in the country.
Mixed economy is also known as dual economy. In a mixed economy, the government runs things as post office, libraries, hospital and many more. Even when there is an industry which is not run by the business, still government get taxes and regulation like wage controls. Most of the people all over our country have no problem with the government take control of things like highway construction, birth certificate, national service economy may seem to be very easy as it is but there are some disadvantages in mixed economy also. The biggest disadvantage is between the public and private sector because they easily get blurred or sometimes shift one way or another from time to time mixed economy usually increase more government control and less individual freedom. This is why mixed economy is always in an evolutionary process.
Mixed economy involve in two sectors which are public sector and private sector. Both of these sectors exists and function to achieve the national objectives. Both of these sectors is the one make the economic system in the country. Mixed economy is the combination of private enterprise with the government enterprise. There is also freedom of enterprise, private ownership and profit earning in this economy. This economy is used in most of the countries in the world.
There are a lot of advantages in mixed economy, for instance, mixed economy help in increasing the national production in the country. In mixed economy, both the public and the private sectors work hard to bring out more good production. The entire problem which is created by the free enterprise and the public control are solved through the mixed economy. Mixed economy provides freedom of enterprise ownership and also the profit earning. There is also social welfare and political freedom in mixed economy. Other than that, all the national resources are utilized under the mixed economy.
Most countries in the world have mixed economy. The mixture of two economic can imply a variety of difference for the country. Some of the differences are beneficial and some are neutral. Mixed economy can keep the workforces employed and provide a market for the raw material that they consume in the production. Additionally, mixed economy has the ability to ensure production of social goods.
Disadvantages of mixed economy are that it is a half way house. Mixed economy is not very helpful in access optimal use of national resources. Other than that, mixed economy also suffers from disadvantage of both the capitalism and the socialism. Mixed economy is said seldom to achieve progress. Mixed economy also has unsuccessful regulations that may paralyze features of production. Mixed economy also has a problem such as lack of price control management that can cause shortage in goods and this can result in a recession.
The disadvantage of a mixed economy really depends on how it is. For an example, if the mixed economy is more to the command economy, it is not too good also. Mixed economy also has many different characteristics. For a example, mixed economy, A might have high tax low regulation while mixed economy B might have mow tax high regulation. This shares a different set of disadvantage because set A gets more profits because of the high tax but as for B it will get lesser profit of the lower tax.
Free enterprise system is an economic system where individuals can make their own economic decision. Because it is said free from government constraints. The advantage of free enterprise system is because there are no government restrictions and this makes more opportunities for the individuals. Therefore, in free enterprise system are more potential for private business. Individuals get more freedom and business opportunity because of the enterprise systems. There are more profit in free enterprise system and less competition and also there are more demands in the production and distribution of goods and services. As there is always a advantage, there is also disadvantage in free enterprise system. The disadvantages are lack of government control, for example, corruption and bribery. In free enterprise system this is the main problem, bribery. The control of that state goes to few hands and the economy move more towards monopoly system. Moreover, there are no reforms in the state and there is also income gap that increases which paralyze the economy in a country.
Central command system refers to a system which is organized by a government. Central command system usually determines how a country’s resources should be exploited. Other than that, it also shows how goods and services should be produced and how it should be distributed. Most industrialized countries practices some form of government oversight. Central command system can be said as a true planned economics. Some of the central command system has permit transactions on a small scale but some larger industries are either managed directly.
This is why mixed economy is said to have the combination if the free enterprise system and the central command system. The advantage of both the free enterprise system and the central command system is the combination of the mixed economy .In mixed economy, price mechanism plays a part. Price mechanism is allowed to operate but sometimes in some cases the price mechanism fails or can say that it fails to work against public interest.
What is price mechanism? Price mechanism is system of interdependence between the supply of a good or service and the price. Price mechanism is basically about the price up when supply is below demand and price down when the supply exceeds demand. Price mechanism also stops supply when suppliers leave the price when the supplies when suppliers leave the market due to the low prices and increases the price there is more suppliers enter the market due to the high price. Price mechanism is also called price system. Price mechanism operates in a free market situation where their forces of petition and supply mechanism prices. Both the producers and the consumers base their specific production and the consumption plans on the current market price. When the consumers pay the price foe a commodity, they motivate the producer of that commodity. The entire price that is paid becomes a vote for more production.
Prices are determined by the shortage and surpluses. Sometimes there is shortage of product. This is because of the price to rise, whereas the surplus causes the price to fall. The price is the one which determine how much of a product a producer decides to supply. When the product price is high, the profit also gets greater and more products profit motive. When the consumer needs more goods or product, the demands get higher and this makes shortage of product or goods and this also causes the price to rise. This makes the consumers to be discouraged but the producers are encouraged to supply more. The price of the good will continue o tries until the shortage problem is solved.
When this problem comes, how does the government play a part? The government plays a part by fixing the prices above or below the free market equilibrium. They also put tax on the production or the sale of the carious goods. Other than that, they also subsidize the production or the sale of the various goods. Price control is the clear example where the government intervention disrupts the price mechanism. The government subsidy will artificially reduce the price and boost the demand of the goods and as foe the government tax, it increases the product’s price to the consumer and decreases the demand also. This explains how government can help to sort out the problem of shortage of product and the raised up price.
In a nutshell, mixed economy there is many advantages and also mixed economy helps to run a better country. Mixed economy makes a better economy in a country because of the give and take policy by the government and the people in the country. Economics should be stable as that the people in the country won’t have any problems. Free enterprise system and central command system is the combination of the mixed economy. Both the system has a lot of advantages. Price mechanism must also be stable so that the mixed economy is stable. Price mechanism plays a big part because it can make havoc in the government and the consumers. Therefore, price mechanism works for mixed economy.

Potters Five Forces With Respect To Icici Prudential Economics Essay

Threat of New Entrants. The average entrepreneur can’t come along and start a large insurance company. The threat of new entrants lies within the insurance industry itself. Some companies have carved out niche areas in which they underwrite insurance. These insurance companies are fearful of being squeezed out by the big players. Another threat for many insurance companies is other financial services companies entering the market.
Power of Suppliers. The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. If a talented insurance underwriter is working for a smaller insurance company (or one in a niche industry), there is the chance that person will be enticed away by larger companies looking to move into a particular market.
Power of Buyers. The individual doesn’t pose much of a threat to the insurance industry. Large corporate clients have a lot more bargaining power with insurance companies. Large corporate clients like airlines and pharmaceutical companies pay millions of dollars a year in premiums. Insurance companies try extremely hard to get high-margin corporate clients.
Availability of Substitutes. This one is pretty straight forward, for there are plenty of substitutes in the insurance industry. Most large insurance companies offer similar suites of services. Whether it is auto, home, commercial, health or life insurance, chances are there are competitors that can offer similar services. In some areas of insurance, however, the availability of substitutes is few and far between. Companies focusing on niche areas usually have a competitive advantage, but this advantage depends entirely on the size of the niche and on whether there are any barriers preventing other firms from entering.
Competitive Rivalry. The insurance industry is becoming highly competitive. The difference between one insurance company and another is usually not that great. As a result, insurance has become more like a commodity – an area in which the insurance company with the low cost structure, greater efficiency and better customer service will beat out competitors. Insurance companies also use higher investment returns and a variety of insurance investment products to try to lure in customers. In the long run, we’re likely to see more consolidation in the insurance industry. Larger companies prefer to take over or merge with other companies rather than spend the money to market and advertise to people.
Pestel analysis
Political and legal factors Within Indian political ambitions and rise of communalism, fissiparous tendencies are on the rise and may well continue for quite some time. Based on this the insurance companies might introduce political risk coverage in their policies. In India the only area where customers consider to a take insurance cover is on customs duty change but also on certain conditions. The term “political risk” has a wider connotation than commonly understood or assumed. It covers events rising not just from politics, but risks in the course of international transactions. Based on this the insurance companies come up with new policies with respect to the problems arising out of foreign legal jurisdiction, political changes and also currency exchange difficulties being faced by many developing countries. Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. In India the entry mode for a company to start up a new life insurance company is to have a paid up capital of 100 crore rupees. Other rules got in by IRDA are Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50% GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time)
Economic Factors
The interest rates at bank and also the provident fund variation affect the life insurance industry as people are always attracted by a higher return. So compared to this the lower return policy is not attractive to the customers. Another factor which affects the life insurance industry is Unemployment, as unemployed people would not have any earnings, savings would be comparatively less which would mean less sales in-turn affecting the GDP of the country and also the industry. Other factors which contribute to the insurance industry are the natural factors like earthquakes, monsoons etc, as these events lead to a lot of deaths, the insurance companies have to pay claim against the policy. A typical Indian will want a better product with a low income so he prefers to pay in annuity or installments (EMI), so that they will not have extra savings to invest in the insurance policy.
One of the main reasons for the economic factor is the inflation rate in today’s market. High inflation rate will tend to reduce the insurances’ business as the money paid to the policy holder during the time of maturity will be less and it would be less attractive for the investor.
Social-cultural factors Population is one of the major factors affecting the industry as the growth in population will indirectly help the companies to capture more market with more people. Life styles is another factor which affect the industry, the current life styles of the people in India are increasingly becoming like nuclear families, as both the parents would be working there would be a possibility of an accident, which would mean more sales for the company In terms of life insurance. Similarly people are interested in having a car and more cars in the road would mean more sales for life insurance. The third factor is the level of education, as India is still a developing country more than 50% of the population is illiterate and the other 50% are not sure about the concept of life insurance, creating the awareness for the product is a big challenge and one of the more contributing factors that affect the life insurance industry.
Technological Factors Internet is becoming a fast house hold name in India where every house in the urban area has a connection. The life insurance industry has taken advantage of this with having many policies which can be flexible to the customer. The customer can check the flexibility sitting at home and select the best policy, pay the monthly installments and everything would be done within minutes. One more factor is the debit and credit card facilities where the customer can pay the installments easily. The life insurance industry is taking a huge advantage of the technology advancement in the world and making it their competitive advantage.
Environmental factors
Insurance companies in India are more affected by the environmental factors which can affect the industry. The Tsunami in 2008 which had such an impact in the south – western India,
Drivers of growth in the insurance industry.
Government support
The existing rule according to the IRDA in India is that a foreign partner can hold a maximum of 26% of equity in an insurance company. Countering this a proposal has been submitted to the government to increase the limit to 49% which would mean more money to be pumped in the market. In 1999, a total of Rs. 8.7 billion has been supplied by the foreign partners and 21 private companies have been granted licenses.
Competition The intense rivalry among the players in the life insurance market is going to affect the industry in a positive way. LIC which has the most market share is showing signs of losing their grip in the competition and other companies like ICICI prudential, Metlife India are gaining.
Legal aspects The insurance sectors growth is more than 3 times the growth of its economy in India. So many businesses or the domestic firms will aim to invest in insurance sector. Moreover, the growth of insurance in India is 13 times more than the growth of insurance industry in the developed countries. So foreign companies will be fostering an immense desire to invest in the Indian insurance market.
Industry life cycle model
Source: (Johnson, et al.2005)
The theory for the Industry Life cycle is given in the Appendix. Analysing the life insurance industry in India the key observations are, the Industry is in the shake-out stage relating to the porters 5 forces analysis we can evaluate that the entry into the market is difficult and there is immense competitive rivalry in the industry and the companies are innovating with many flexible policies to suit the potential customer. The present market players like LIC, ICICI Prudential, Metlife India insurance are having a strong Managerial and Financial position, they are capable of holding the market which in the present market scenario is a key to holding customers so the weak companies are not able to cope up with this scenario and are either being taken over by the big companies or they are just run over.
Scenario 1
In the future we might see a lot of companies merging in order to compete with LIC which has about 68% of the market share. The next major company holding the market is ICICI Prudential with 8% which is also a joint venture between ICICI Bank and Prudential life Insurance.
The difference between the top two companies is 60%. Which can also be told as a monopoly by LIC. As the insurance industry is one of the most emerging in the world many companies want to compete for the market share.Given the scenario, the only weakness that LIC has is their customer relationship management, other companies have made that area their strongest.
Taking into consideration one of the drivers for change that is mentioned above, which says that the government might increase the limit of foreign companies’ equity to 49%, there are many opportunities for the joint ventures to happen. Few companies have already established themselves in the market like AIG with Tata, ING with Vyasaya.
Scenario 2
Life Insurance becoming more tech-savvy.
Another scenario is that the life insurance companies make trading online for the customers. That is make everything available in the internet for the customers like paying of premium, choosing the right policies etc.
ICICI Prudential has tried its hand at the technology by giving more information about their policies and services they offer to the customers where the customers can check and enquire anything they want to know. This is one of the stepping stones to the technology of having everything electronic where the customer won’t be harnessed to the paper work of having a life insurance.
Many other companies have taken upon this area and soon it will be a boon to the customers.
Scenario 3
Life insurance as growth of the economy
Since India’s life insurance industry liberalized in 1999, there have been companies coming to India and with it increasing the competition, the innovation, the flexibilities etc. Insurance industry’s contribution towards the GDP has increased significantly from 2.3% in 2001 to 5.2% in 2011. The Life insurance covers have increased about 12times in the past decade and Many analysts predict that by 2020 India will be one of the three top countries in the insurance market. The statistics say that the insurance industry will reach upto $350-$400 billion by 2020. (Study of insurance sector, 2011)
Changing scenario in the life insurance industry!