2.01 Economic Systems2.01 Economic Systems

Objective 2.01 Compare Objective 2.01 Compare different types of economic different types of economic systems: traditional, free systems: traditional, free enterprise, command and enterprise, command and

mixed.mixed.

What is Economics?What is Economics?

Economics studies how individuals Economics studies how individuals and societies seek to satisfy and societies seek to satisfy needs and wants through needs and wants through incentives, choices, and allocation incentives, choices, and allocation of scarce resources. of scarce resources.

Oil & fuel

Land

Doctors

Technology

Factors of ProductionFactors of Production Economic ResourcesEconomic Resources

Natural ResourcesNatural Resources – raw materials found in – raw materials found in nature that are used to produce goodsnature that are used to produce goods

Human ResourcesHuman Resources – people’s knowledge, – people’s knowledge, efforts, and skills used in their workefforts, and skills used in their work

Capital ResourcesCapital Resources – used to produce goods – used to produce goods and services (buildings, materials, and and services (buildings, materials, and equipment)equipment)

Entrepreneurial ResourcesEntrepreneurial Resources - recognize the - recognize the need for new goods or serviceneed for new goods or service

Scarcity – shortage of resourcesScarcity – shortage of resources

Why Economic Systems?Why Economic Systems? Nations use economic systems to Nations use economic systems to

determine how to use their limited determine how to use their limited resources effectively.resources effectively.

Primary goal of an economic system Primary goal of an economic system is to provide people with a minimum is to provide people with a minimum standard of living, or quality of life.standard of living, or quality of life.

Different types of Economic SystemsDifferent types of Economic Systems Traditional EconomyTraditional Economy Market Economy (free enterprise)Market Economy (free enterprise) Command EconomyCommand Economy Mixed EconomyMixed Economy

Traditional EconomyTraditional Economy Found in rural, under-Found in rural, under-

developed countries–developed countries– VanuatuVanuatu Pygmies of CongoPygmies of Congo Eskimos & Indian Eskimos & Indian

tribes tribes BelarusBelarus

Customs govern the Customs govern the economic decisions economic decisions that are made that are made

Farming, hunting and Farming, hunting and gathering are done gathering are done the same way as the the same way as the generation beforegeneration before

Economic activities are Economic activities are centered around the centered around the family or ethnic unit family or ethnic unit

Men and women are Men and women are given different given different economic roles and economic roles and tasks tasks

AdvantagesAdvantages: people : people have specific roles; have specific roles; security in the way security in the way things are donethings are done

DisadvantagesDisadvantages: : Technology is not used; Technology is not used; difficult to improvedifficult to improve

Market Economy (Free Enterprise)Market Economy (Free Enterprise)

Also called aAlso called a Free Free Market Economy or Market Economy or Free Enterprise Free Enterprise EconomyEconomy

Businesses and Businesses and consumers decide consumers decide what they will produce what they will produce and purchase and in and purchase and in what quantitieswhat quantities

Decisions are made Decisions are made according to according to law of law of supply & demandsupply & demand

Supply and demand of Supply and demand of goods and services goods and services determine what is determine what is produced and the price produced and the price that will be chargedthat will be charged..

AdvantageAdvantage—competition —competition to have the best to have the best products and servicesproducts and services

DisadvantageDisadvantage—huge rift —huge rift between wealthy and between wealthy and poorpoor

Note: a Note: a true market true market economyeconomy does not exist. does not exist.

Command EconomyCommand Economy The government (or The government (or

central authority) central authority) determines what, how, determines what, how, and for whom goods and for whom goods and services are and services are produced.produced.

Two types: Two types: Strong Command – Strong Command –

where government where government makes all decisions makes all decisions (communism – (communism – China, China, CubaCuba) )

Moderate Command – Moderate Command – where some form of where some form of private enterprise private enterprise exists but the state exists but the state owns major resources owns major resources (socialism – (socialism – France and France and SwedenSweden))

AdvantagesAdvantages Guarantees equal Guarantees equal

standard of living for standard of living for everyone everyone

Less crime and povertyLess crime and poverty Needs are provided for Needs are provided for

through the governmentthrough the government DisadvantagesDisadvantages

Minimal choicesMinimal choices Fewer choices of items Fewer choices of items No incentive to produce No incentive to produce

better product or engage better product or engage in entrepreneurshipin entrepreneurship

Also known as aAlso known as a Planned Planned or Managed Economyor Managed Economy

Mixed EconomyMixed Economy Combination of a Combination of a

market and a market and a command command economy economy

Government Government takes of people’s takes of people’s needsneeds

Marketplace Marketplace takes care of takes care of people’s wants.people’s wants.

Most nations have Most nations have a mixed economy:a mixed economy: United States, United States, England, AustraliaEngland, Australia

AdvantageAdvantage——balance of needs balance of needs and wants met by and wants met by government and in government and in marketplacemarketplace

DisadvantageDisadvantage——citizens have to citizens have to pay taxespay taxes