Economic Systems

How Does An Economy Work?

Nations must answer 3 basic Economic question: What goods and services should be

produced? How should the goods and services

be produced? For whom should the goods and

services be produced? The way a nation answers these

questions defines their economy.

Types of Economic Systems

All economic systems fall into one of two broad categories: Market (or Capitalist) System Command (or Planned) System

No economy can be purely market or purely command

Elements of both economies are found in all systems this makes all economies mixed

Industrial Revolution brings changes

The Industrial Revolution brings further width to the gap between the rich and the poor or the Haves and the Have-nots

Business leaders want the government to stay out of economic affairs.

Reformers want the government to take a more active role and help the poor.

Mixed Economies Some government involvement

through mandatory laws and regulations that businesses follow Labor Laws, Minimum Wage

The government provides social programs for those who need help Medicare, welfare

All economies are mixed they are classified based on how much the government is involved in the process

Continuum of Economic Systems

Command Economy

Communism

On the far left

Market Economy

CapitalismOn the far

right

SocialismLeft of center but right of communism

Adam Smith Laissez-faire: economic

policy of letting business/industry owners set working conditions without interference

Adam Smith believed in the idea of free markets.

3 laws: Self interest Competition Supply and Demand

Discussion

Why would workers/every day people be against laissez faire economics?

Capitalism An economic system in which

business/industry are privately owned and money is invested to make profits.

The government is concerned about its people and takes care of those who cannot care for themselves

The political system is a democracy with leaders elected by the people

The United States and Japan are examples of a Capitalist Economy

Socialism The factors of production are owned by the

public and operate for the welfare of all The main goal is to keep prices low for all

people and to provide employment for many

The government runs key industries (i.e. factories and railroads) and makes economic decisions

More social services for all and free or low cost medical care

Canada, Germany, Sweden, Australia and Great Britain are all examples of socialist economies

Radical Socialism: Marxism

Karl Marx Friedrick Engels

Communism The government runs everything

(Totalitarian government) Only one political party, the Communist

party, runs the government All people able to work are assigned jobs

– there is virtually no unemployment The government assigns housing,

schools, and occupations There is little to no economic freedom Cuba, North Korea, and China are

examples

Answer the following questions using the chart

Liberal Reactionary

Pure

Democracy

Representative

Democracy

Absolute

Monarchy

Totalitarian Dictatorshi

p

Capitalism

Mixed Economy

Socialism Communism

1.Can democracy exist in a communist system? Why or why not?

2.Can dictators promote capitalism? Why or why not? 3.Can there be a socialist democracy? Why or why not? 4.What is a mixed economy? Can an absolute monarchy

promote a mixed economy? Why or why not? 5.Where does the United States fit on the political-economic

spectrum?

Economies In Transition The breakup of the Soviet Union is the

best example of a country changing from a Command Economy to a Market Economy

State owned industries have been privatized (government owned businesses are sold to private citizens)

Today even socialist countries are selling some of their government owned businesses to individuals