Economic Economic SystemsSystems

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 to use country needs a system to determine how to use its productive resourcesits 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 Questions (3E?’s)The 3 Economic Questions (3E?’s)

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

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

3.3. FOR WHOM TO PRODUCE? FOR WHOM TO PRODUCE? (Who gets to have the (Who gets to have the goods and services?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 EconomiesMixed Economies! ! (Market + Command)(Market + Command)

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

decisions are decisions are based on customs and beliefsbased on customs and beliefs People will make what they always made & People will make what they always made &

will do the same work their parents didwill do the same work their parents did Exchange of goods is done through Exchange of goods is done through

BarteringBartering: trading without using money: trading without using money

How a Traditional Economy How a Traditional Economy answers the 3E?’sanswers the 3E?’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 produced Who are the goods & services produced for?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 economytraditional economy

PredictablePredictableKnowing what your job willKnowing what your job will

be beKnowing the way you willKnowing the way you will

live live

Problems with a Problems with a traditional economytraditional economy

Lack many resourcesLack many resourcesOnly produce enough to Only produce enough to live onlive on

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

owns most of the propertyowns most of the property Governmental planning groups determine such Governmental planning groups determine such

things as the prices of goods/services & the wages things as the prices of goods/services & the wages of workersof workers

This system has not been very successful & more This system has not been very successful & more and more countries are abandoning itand more countries are abandoning it

How a Command Economy How a Command Economy answers the 3E?’sanswers the 3E?’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 they having a Command economy since 1991. Now they have a Mixed economy.have a Mixed economy.

Positives of a Positives of a command economycommand economy

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

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 production An economic system in which production

and distribution questions are answered by and distribution questions are answered by prices and profits (supply and demand)prices and profits (supply and demand)

Most of the resources are owned by private Most of the resources are owned by private citizenscitizens

Economic Economic decisions are based on decisions are based on Free Free EnterpriseEnterprise (competition between (competition between companies)companies) Important economic questions are not answered Important economic questions are not answered

by gov. but by individualsby gov. but by individuals Gov. does not tell a business what goods to Gov. does not tell a business what goods to

produce or what price to chargeproduce or what price to charge

How a Market Economy answers How a Market Economy answers the 3E?’sthe 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 economiesno truly pure Market economies, , but the United States is close.but the United States is close.

In a truly free market economy, the In a truly free market economy, the government would not be involved at allgovernment would not be involved at all There would be There would be no laws to protect workers no laws to protect workers form form

unfair bossesunfair bosses There would be There would be no rulesno rules to make sure that to make sure that

credit cards were properly protectedcredit cards were properly protected

Many societies have chosen to have some Many societies have chosen to have some rules to protect consumers, workers, and rules to protect consumers, workers, and businesses (businesses (MIXEDMIXED)) These rules reduce the freedoms that businesses These rules reduce the freedoms that businesses

have, but they also protect the workers and have, but they also protect the workers and consumersconsumers

Positives of a Positives of a market economymarket economy

People can start their own People can start their own businessesbusinesses

People have choicePeople have choice

Problems with a Problems with a market economymarket economy

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

Business owners have to Business owners have to risk losing moneyrisk losing money

Mixed EconomyMixed Economy Market + Command = MixedMarket + Command = Mixed Businesses own most resources and determine Businesses own most resources and determine

what and how to produce, but the what and how to produce, but the government regulates certain industriesgovernment regulates certain industries

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

How a Mixed Economy answers How a Mixed Economy answers the 3E?’sthe 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 produced Who are the goods and services produced for?for? consumersconsumers

Mixed EconomiesMixed Economies

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

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

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 Best?Which Economic System Is 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 and Citizens are free to own their own property and

use it in the most efficient and profitable wayuse it in the most efficient and profitable way

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