Economic SystemsEconomic Systems

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 somethingScarcity = not having enough of something

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

The 3 Economic The 3 Economic Questions (3E?’s)Questions (3E?’s)

1.1. WHAT TO PRODUCE? WHAT TO PRODUCE? (What kinds of goods (What kinds of goods and services should be produced?)and services should be produced?)

2.2. HOW TO PRODUCE? HOW TO PRODUCE? (What productive (What productive resources are used to produce goods and resources are used to produce goods and services?)services?)

3.3. FOR WHOM TO PRODUCE? FOR WHOM TO PRODUCE? (Who gets to (Who gets to have the goods and services?have the goods and services?

Three Types of Economic Three Types of Economic Systems:Systems:

1. Traditional Economy1. Traditional Economy

2. Command Economy2. Command Economy

3. Market Economy3. Market Economy

* Most countries are… * Most countries are… Mixed Mixed EconomiesEconomies! (Market + Command)! (Market + Command)

Traditional EconomyTraditional Economy An economic system in which An economic system in which

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 moneymoney

How a Traditional How a Traditional Economy answers the Economy answers the 3E?’s3E?’s Who decides what to produce?Who decides what to produce? People People follow their customs and make what follow their customs and make what

their ancestors madetheir ancestors made Who decides how to produce goods & Who decides how to produce goods &

services?services? People People grow & make things the same way that grow & make things the same way that

their ancestors didtheir ancestors did Who are the goods & services Who are the goods & services

produced for?produced for? People in the People in the village who need themvillage 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

Positives of a Positives of a traditional traditional economyeconomyPredictablePredictable

Knowing what your job Knowing what your job willwill be be

Knowing the way you willKnowing the way you will live live

Problems with a Problems with a traditional economytraditional economy

Lack many Lack many resourcesresources

Only produce Only produce enough to live onenough to live on

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

& owns most of the property& owns 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 workers& the 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

How a Command How a Command Economy answers the Economy answers the

3E?’s3E?’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

Command SystemCommand System

Countries with Countries with communist governments have communist governments have Command economiesCommand 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 from *Germany and Russia have moved away from having a Command economy since 1991. Now having a Command economy since 1991. Now they have a Mixed economy.they have a Mixed economy.

Positives of a Positives of a command command economyeconomy

Because the government Because the government makes the decisions, makes the decisions, people don’t have to people don’t have to worry about employment, worry about employment, housing, education, and housing, education, and healthcarehealthcare

Problems with a Problems with a command economycommand economy

Consumers get lowConsumers get low priority priority

Little freedom of choiceLittle freedom of choiceAll resources are ownedAll resources are owned by the government by the government

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

production and distribution production and distribution questions are answered by prices questions are answered by prices and profits (supply and demand)and profits (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 EnterpriseFree Enterprise (competition (competition between companies)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 goods Gov. does not tell a business what goods

to produce or what price to chargeto produce or what price to charge

How a Market Economy How a Market Economy answers the 3E?’sanswers 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

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

Positives of a Positives of a market economymarket economy

People can start their People can start their own businessesown businesses

People have choicePeople have choice

Problems with a Problems with a market economymarket economy

The desire for money The desire for money may lead to poor quality may lead to poor quality of goods and servicesof goods and services

Business owners have Business owners have to risk losing moneyto risk losing money

Mixed EconomyMixed Economy Market + Command = MixedMarket + Command = Mixed There are no pure command or market There are no pure command or market

economies. economies. To some degree, all modern economies exhibit To some degree, all modern economies exhibit

characteristics of both systems and are often characteristics of both systems and are often referred to as mixed economies. referred to as mixed economies.

Most economies are closer to one type of Most economies are closer to one type of economic system than anothereconomic system than another

Businesses own most resources and Businesses own most resources and determine what and how to produce, but the determine what and how to produce, but the government regulates certain industriesgovernment regulates certain industries

How a Mixed Economy How a Mixed Economy answers the 3E?’sanswers the 3E?’s

Who decides what to produce?Who decides what to produce? businessesbusinesses

Who decides how to produce goods and Who decides how to produce goods and services?services? Businesses, but the government regulates Businesses, but the government regulates

certain industriescertain industries Who are the goods and services Who are the goods and services

produced for?produced for? consumersconsumers

Mixed EconomiesMixed Economies

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

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

Positives of a Positives of a Mixed economyMixed economy

Private Ownership of Private Ownership of businessesbusinesses

Protects citizens/workers Protects citizens/workers with government with government regulationsregulations

Protects environment Protects environment

Problems with a Problems with a Mixed economyMixed economy

Government Government intervention can intervention can prevent profit for prevent profit for companiescompanies

Continuum of EconomiesContinuum of Economies

MostIndividual freedom

NoIndividual freedom

Pure Market

Pure Command

Most economies fall in between a pure market and a pure command economy on the continuum

Economy ContinuumEconomy Continuum

Command Market

Cuba Russia Germany USAustralia

UK

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

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

and use it in the most efficient and profitable and use it in the most efficient and profitable wayway

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