Economic Economic SystemsSystems

Economic SystemsEconomic Systems

An An economic system economic system describes how a describes how a country’s economy is organizedcountry’s economy is organized

Because of the problem of Because of the problem of scarcityscarcity, every , every country needs a system to determine how country needs a system to determine how to use its productive resourcesto use its productive resources

Scarcity not having enough of Scarcity not having enough of somethingsomething

An economic system An economic system must answer 3 must answer 3 questions…questions…

Types of Economic Systems:Types of Economic Systems:

1. Traditional Economy1. Traditional Economy

2. Command Economy2. Command Economy

3. Market Economy3. Market Economy

Most countries are… Mixed Economies! Most countries are… Mixed Economies!

(Market + Command)(Market + Command)

Traditional EconomyTraditional Economy Economic decisions are Economic decisions are based on based on

customs and beliefscustoms and beliefs People will make what they always People will make what they always

made & will do the same work their made & will do the same work their parents didparents did

Exchange of goods is done through Exchange of goods is done through BarteringBartering(trading without using (trading without using money)money)

Traditional EconomyTraditional EconomyWho decides what to produce?Who decides what to produce?

People follow their customs and make what their People follow their customs and make what their ancestors madeancestors made

Who decides how to produce goods & Who decides how to produce goods & services?services?

People grow & make things the same way People grow & make things the same way that their ancestors didthat their ancestors did

Who are the goods & services produced Who are the goods & services produced for?for?

People in the village who need themPeople in the village who need them

Traditional Economy Traditional Economy

Examples:Examples: Villages in Africa and South America Villages in Africa and South America the Inuit tribes in Canadathe Inuit tribes in Canada the caste system in parts of rural Indiathe caste system in parts of rural India the Aborigines in Australiathe Aborigines in Australia

Command SystemCommand System Government makes all economic decisions & Government makes all economic decisions &

owns most of the propertyowns most of the property

Governmental planning groups determine Governmental planning groups determine such things as the prices of goods/services & such things as the prices of goods/services & the wages of workersthe wages of workers

This system has not been very successful & This system has not been very successful & more and more countries are abandoning itmore and more countries are abandoning it

Command EconomyCommand Economy 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

Command SystemCommand System

Countries with Countries with communist governments communist governments have Command economieshave Command economies

Examples: Examples: There are no truly pure command There are no truly pure command economic systems, but close countries are: economic systems, but close countries are: North Korea, former Soviet Union, CubaNorth Korea, former Soviet Union, Cuba

*Germany and Russia have moved away *Germany and Russia have moved away from having a Command economy since from having a Command economy since 1991. Now they have a Mixed economy.1991. Now they have a Mixed economy.

Market EconomyMarket Economy An economic system in which An economic system in which

production and distribution questions production and distribution questions are answered by supply and demandare answered by supply and demand

Most of the resources are owned by Most of the resources are owned by private citizensprivate citizens

Economic Economic decisions are based on decisions are based on Free Free EnterpriseEnterprise (competition between companies)(competition between companies)

Important economic questions are not Important economic questions are not answered by gov. but by individualsanswered by gov. but by individuals

Gov. does not tell a business what Gov. does not tell a business what goods to produce or what price to goods to produce or what price to chargecharge

Market EconomyMarket EconomyWho 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

Market EconomyMarket Economy There are There are no truly pure Market no truly pure Market

economieseconomies, but the United States is , but the United States is close.close.

In a truly free market economy, the In a truly free market economy, the government government would not be involved at allwould not be involved at all

There would be There would be no laws to protect workers no laws to protect workers form unfair form unfair bossesbosses

There would be There would be no rulesno rules to make sure that credit cards to make sure that credit cards were properly protectedwere properly protected

Many societies have chosen to have some rules to Many societies have chosen to have some rules to protect consumers, workers, and businesses (protect consumers, workers, and businesses (MIXEDMIXED))

These rules reduce the freedoms that businesses have, These rules reduce the freedoms that businesses have, but they also protect the workers and consumersbut they also protect the workers and consumers

Mixed EconomyMixed Economy

Mixed EconomyMixed Economy

Mixed EconomiesMixed Economies

Most democratic countries fall in this Most democratic countries fall in this categorycategory (there are no truly pure (there are no truly pure Market or Command economies).Market or Command economies). Examples: Examples: Brazil, Mexico, Canada, UK, Brazil, Mexico, Canada, UK,

US, Germany, Russia, Australia, etc.US, Germany, Russia, Australia, etc.

Economy ContinuumEconomy Continuum

Command Market

Cuba Russia Germany USAustralia

UK

Which Economic System Is Best?Which Economic System Is Best?

Market system Market system has proven to be best because it has proven to be best because it promotes the goals of growth, freedom, & efficiencypromotes the goals of growth, freedom, & efficiency Citizens are free to own their own property and use it in the Citizens are free to own their own property and use it in the

most efficient and profitable waymost efficient and profitable way

Command and Traditional systems Command and Traditional systems sometimes offer sometimes offer more security, but are not nearly as strong in more security, but are not nearly as strong in efficiency, growth, freedom, and environmental efficiency, growth, freedom, and environmental qualityquality

Economic Freedom Rankings