Introduction to Economic Systems

Personal Finance

Mr. Tumino

Discussion…

• How would you define economics?

• What is an economic system?

• How does economics impact you?

Comparative Economics Systems

• The major economic systems are traditional economy, market economy, command economy and mixed economy.

• There are also countries that are said to have developing economies, moving from a traditional to a market economy.

Definitions• Factors of production:

– Those things necessary to produce goods and services.

» Land

» Labor

» Capital (money, buildings, equipment, etc.)

» Management

Definitions

• Traditional economy:– An economic system in which the factors of

production are settled by rules accepted as good and correct

– Normally used to describe economic systems that pertain in societies with extensive subsistence agriculture

– Used by members of industrialized societies to describe societies deemed "underdeveloped"

Definitions

• Market economy:– An economy in which the prices of goods and

services are determined in a free price system.– A system in which buyers and sellers exchange

on the basis of supply and demand.– Also known as a capitalist economy.

Market Economy

Definitions

• Command economy:– An economic system in which decisions

regarding the factors of production are made by government leaders.

Command Economy

Command Economies

• Two types of command economies:

– Communist—strict government control of the entire society

Command Economies

– Socialist—three main goals of this type of economy:

• An equitable distribution of wealth and economic opportunity

• Society’s control, through its government, makes decisions about public goods.

• Public ownership of services and factories that are essential.

Definitions

• Mixed economy:

– A combination of market, command, or traditional economy.

– A system in which free enterprise is affected by government regulations.

Mixed Economy

Economic Decisions• All economic systems must make three basic

economic decisions:

– What and how many goods and services should be produced

– How should they be produced

– Who gets the goods and services that are produced

Economic Decision Making

• These decisions are made differently in the three major economic systems:

– Traditional—habit and custom determine the rules.

– Market—this economy is based on free enterprise, the idea that private individuals or groups have the right to own property or businesses and make a profit with only limited government interference.

– Command—the government controls the economy is this system.