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Economic Systems Defined and Explained

+Food for Thought ….

Remember that most countries have a blend between all four economic systems. No “pure” systems really exist.

+Economic Systems

Economists have identified four types of economic systems.

They are different from one another based on how they answer …

What is produced? How is it produced? For whom is it produced?

+Traditional Economy

Economists' decisions are based on customs and beliefs which have been handed down from generations.

“The way they have always been done.”

For example, if your father is a fisherman than you are expected to grow up and become a fisherman.

+Traditional Economy

Advantages: You know what is expected of you Family and community ties are very

strong

Disadvantages: Change is discouraged Production is often inefficient

Where do you think these economies may exist?

+Command Economy

Government leaders control factors of production and make all decisions about their use.

They decide what will be produced, how resources will be used and how goods will be distributed.

For example: You may not be allowed to choose your career. The government guides people into certain jobs and wages are decided for you.

+Command Economy

Disadvantages: Lack of incentives to work hard Lack of choice

There are not many examples of Command Economy’s today. One example would be North Korea

Are there any advantages to this type of economy?

+Socialism & Communism

The state owns the major factors of production

Individual rights are limited to eliminate social classes

Taxation is often used to redistribute income

How are they different?

Communism is more extreme and refers to politics as well as the economy.

+Market Economy

The individuals make the economic decisions because government is limited

Individuals decide what to produce and how to produce it

Freedom of prices

+Market Economy Advantages:

Freedom to choose your career, to own property and to spend money how you want

Disadvantages: Concern with people too young, too old or

too sick to work Perhaps the government, churches or

other organizations should help them

+Capitalism – A Market Economy

Economic system in which private individuals own the factors of production

Pure capitalism has been called laissez-faire“Let people do as they choose” Individuals and business make their own

economic decisions without any government interference.

Is the United States a purely capitalist nation?

+Characteristics of Capitalism

1. Freedom of Enterprise – Individuals own the factors of production and decide how to use them, within legal limits.

Ex. Entrepreneurs

2. Freedom of Choice – Individuals freely choose what they want to buy.

How does this affect the Freedom of Enterprise?

+Characteristics of Capitalism

3. Profit Incentive – Sellers want to make a profit. There is a risk of failing.

Profit – The amount left after all the costs of production have been paid (Ex. wages and taxes)

4. Competition – Rivalry among producers or sellers of similar goods and services to win more business

How would good competition better our economy?

+Mixed Economy

Combines elements of a market economy with a command economy

For example: “In the United States, most decisions are

made by individuals reacting as participants within the market. Federal, state and local governments, however, make laws protecting private property and regulating certain areas of business. Such regulations include certain environmental protections, safety guidelines for workers, and laws to protect consumers.