Economic Economic SystemsSystems

Economic QuestionsEconomic Questions

• What to produce?What to produce?– Allocation of factors of productionAllocation of factors of production

• How to produce?How to produce?– Methods of productionMethods of production

• For whom to produce?For whom to produce?– Distribution of goods & servicesDistribution of goods & services

Traditional SystemTraditional System• Questions answered by custom, Questions answered by custom,

habit, religionhabit, religion

• Choices are limited, change comes Choices are limited, change comes slowlyslowly

• Family values are key Family values are key

to social structureto social structure

AmishAmish

Iroquois IndiansIroquois Indians

Command System•Central authority Central authority

regulates productionregulates production

•Government owns the Government owns the factors of productionfactors of production

•Limited set of goods Limited set of goods producedproduced

Market SystemMarket System• Private firms produce goods & Private firms produce goods &

servicesservices

• Private producers decide Private producers decide how much to producehow much to produce

• The “invisible hand” The “invisible hand” guides the economyguides the economy

Mixed Market SystemsMixed Market Systems• Government acts as stabilizer of Government acts as stabilizer of

economic activityeconomic activity

• Large unions & large Large unions & large corporations can dominate the corporations can dominate the marketmarket

• Private ownership is mixed with Private ownership is mixed with public ownership of factors of public ownership of factors of productionproduction

• Regulation of private economy Regulation of private economy may be strong or weakmay be strong or weak