Economic Systems

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Economic Systems
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Economic Systems

• An economic system describes how a countrys
  economy is organized
• Because of the problem of scarcity, every country
  needs a system to determine how to use its
  productive resources
• Scarcity not having enough of something
• An economic system must answer 3 questions

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The 3 Economic Questions (3E?s)

1. WHAT TO PRODUCE? (What kinds of goods and
   services should be produced?)
2. HOW TO PRODUCE? (What productive resources are
   used to produce goods and services?)
3. FOR WHOM TO PRODUCE? (Who gets to have the goods
   and services?

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Three Types of Economic Systems

• 1. Traditional Economy
• 2. Command Economy
• 3. Market Economy
• Most countries are Mixed Economies! (Market
  Command)

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Traditional Economy

• An economic system in which economic decisions
  are based on customs and beliefs
• People will make what they always made will do
  the same work their parents did
• Exchange of goods is done through Bartering
  trading without using money

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How a Traditional Economy answers the 3E?s

• Who decides what to produce?
• People follow their customs and make what their
  ancestors made
• Who decides how to produce goods services?
• People grow make things the same way that their
  ancestors did
• Who are the goods services produced for?
• People in the village who need them

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Traditional Economy

• Examples
• Villages in Africa and South America
• the Inuit tribes in Canada
• the caste system in parts of rural India
• the Aborigines in Australia

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Positives of a traditional economy

• Predictable
• Knowing what your job will be
• Knowing the way you will live

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Problems with a traditional economy

• Lack many resources
• Only produce enough to live on

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Command System

• Government makes all economic decisions owns
  most of the property
• Governmental planning groups determine such
  things as the prices of goods/services the
  wages of workers
• This system has not been very successful more
  and more countries are abandoning it

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How a Command Economy answers the 3E?s

• Who decides what to produce?
• Government makes all economic decisions
• Who decides how to produce goods and services?
• Government decides how to make goods/services
• Who are the goods and services produced for?
• Whoever the government decides to give them to

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Command System

• Countries with communist governments have
  Command economies
• Examples There are no truly pure command
  economic systems, but close countries are
  North Korea, former Soviet Union, Cuba
• Germany and Russia have moved away from having
  a Command economy since 1991. Now they have a
  Mixed economy.

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Positives of a command economy

• Because the government makes the decisions,
  people dont have to worry about employment,
  housing, education, and healthcare

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Problems with a command economy

• Consumers get low priority
• Little freedom of choice
• All resources are owned by the government

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Market Economy

• An economic system in which production and
  distribution questions are answered by prices and
  profits (supply and demand)
• Most of the resources are owned by private
  citizens
• Economic decisions are based on Free Enterprise
  (competition between companies)
• Important economic questions are not answered by
  gov. but by individuals
• Gov. does not tell a business what goods to
  produce or what price to charge

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How a Market Economy answers the 3E?s

• Who decides what to produce?
• Businesses base decisions on supply and demand
  and free enterprise (PRICE)
• Who decides how to produce goods and services?
• Businesses decide how to produce goods
• Who are the goods and services produced for?
• consumers

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Market Economy

• There are no truly pure Market economies, but the
  United States is close.

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• In a truly free market economy, the government
  would not be involved at all
• There would be no laws to protect workers form
  unfair bosses
• There would be no rules to make sure that credit
  cards were properly protected
• Many societies have chosen to have some rules to
  protect consumers, workers, and businesses
  (MIXED)
• These rules reduce the freedoms that businesses
  have, but they also protect the workers and
  consumers

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Positives of a market economy

• People can start their own businesses
• People have choice

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Problems with a market economy

• The desire for money may lead to poor quality of
  goods and services
• Business owners have to risk losing money

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Mixed Economy

• Market Command Mixed
• Businesses own most resources and determine what
  and how to produce, but the government regulates
  certain industries
• There are no pure command or market economies.
• To some degree, all modern economies exhibit
  characteristics of both systems and are often
  referred to as mixed economies.
• Most economies are closer to one type of economic
  system than another

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How a Mixed Economy answers the 3E?s

• Who decides what to produce?
• businesses
• Who decides how to produce goods and services?
• Businesses, but the government regulates certain
  industries
• Who are the goods and services produced for?
• consumers

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Mixed Economies

• Most democratic countries fall in this category
  (there are no truly pure Market or Command
  economies).
• Examples Brazil, Mexico, Canada, UK, US,
  Germany, Russia, Australia, etc.

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Continuum of Economies
Pure Command
Pure Market
MostIndividual freedom
NoIndividual freedom
Most economies fall in between a pure market and
a pure command economy on the continuum
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Economy Continuum
Command
Market
US
UK
Germany
Cuba
Russia
Australia
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Which Economic System Is Best?

• Market system has proven to be best because it
  promotes the goals of growth, freedom,
  efficiency
• Citizens are free to own their own property and
  use it in the most efficient and profitable way
• Command and Traditional systems sometimes offer
  more security, but are not nearly as strong in
  efficiency, growth, freedom, and environmental
  quality