Economic Systems -- An economic system describes how a country’s economy is organized -- Because of the problem of scarcity, every country needs a system to determine how to use its productive resources An economic system must answer…
3 Basic Economic Questions WHAT WHAT to produce? (What kind of goods and services should be produced?” HOW HOW to produce? (What productive resources are used to produce goods and services) FOR WHOM FOR WHOM to produce? ( Who gets to have the goods and services?) The way a society answers these questions determines Its economic system.
Four Types of Economic Systems: 1.Traditional Economy 2.Market Economy (Capitalism) 3.Command Economy (Socialism) 4.Mixed Economy (Market + Command)
Traditional Economy -- An economic system in which economic decisions are based on customs and beliefs -- People will make what they always made and will do the same work their parents did -- Exchange of goods is done through BARTERING – trading without using money
Traditional Economy Who decides what to produce? -- People follow their customs and make what their ancestors made their ancestors made Who decides how to produce goods & services? -- People grow & make things the same way that their ancestors did that their ancestors did Who are the goods & services produced for? -- People in their family & village -- People in their family & village
Traditional Economy Examples: Villages in Africa and South America; the Inuit tribes in Canada; the caste the Inuit tribes in Canada; the caste system in parts of rural India. system in parts of rural India.
Market Economy (Capitalism) -- An economic system in which -- An economic system in which economic decisions are guided by economic decisions are guided by the changes in prices that occur as the changes in prices that occur as individual buyers and sellers individual buyers and sellers interact in the market place. interact in the market place. -- Most of the resources are owned by private citizens private citizens
Market Economy (con’t.) -- Economic decisions are based on F FF Free Enterprise (competition between companies) -- Important economic questions are NOT answered by gov’t, but by INDIVIDUALS!!! -- Gov’t does NOT tell a business what goods to produce or what price to charge
Market Economy (Capitalism) -- -- Who decides what to produce? Businesses Businesses base decisions on supply and demand supply and demand and free (PRICE) enterprise (PRICE) Who decides how to produce goods -- Who decides how to produce goods and services? and services? Businesses Businesses decide how to produce goods.
Market Economy Market Economy (con’t.) Who are the goods and services produced for? the consumers -- the consumers
Market Economy -- (Capitalism) There are no truly pure Market Economies, but the United States Is close --
Command System -- Government -- Government makes all economic decisions and owns most of the property decisions and owns most of the property -- Governmental planning groups determine such things as the prices of determine such things as the prices of good and services and the wages of workers good and services and the wages of workers This system has not been very successful & more and more countries are abandoning it. more and more countries are abandoning it.
Command Economy Who decides what to produce? -- Government -- Government makes all economic decisions decisions Who decides how to produce goods and services? services? Government -- the Government Who are the goods and services produced for? produced for? -- Whoever the gov’t decides to give them to -- Whoever the gov’t decides to give them to
Command System -- Countries with COMMUNIST -- Countries with COMMUNIST governments have Command economies governments have Command economies -- Examples: Cuba, former Soviet Union, North Korea, China North Korea, China -- East Germany & the former USSR have moved away from having a Command economy since 1991. Now they have a Mixed economy. Now they have a Mixed economy.
Mixed Economy Market + Command = Mixed Market + Command = Mixed There are no pure command or market economies. To some degree, all modern economies exhibit characteristics of both systems and are often referred to as MIXED economies.
Mixed Economy – Mixed Economy – (con’t.) Most economies are closer to one type of economic system than to another. Businesses own most resources and determine what and how to produce, but the Government regulates certain industries -- (airports, railroads, U.S. mail)
Mixed Economy -- Most democratic countries fall in this category -- (there are no truly pure Market or Command economies. -- Examples: Brazil, Mexico, Canada, United Kingdom, India, etc.
socialism socialism – the belief that the means of production should be owned and operated by and for the people in general rather than by and for private individuals
Socialism & Communism are often used interchangeably Technically: SocialismECONOMIC Socialism is an ECONOMIC system CommunismPOLITICAL Socialism Communism is a POLITICAL system – that uses Socialism
Two leading Critics of Capitalism: Karl O. Marx Friedrich Engels
MARX The ideas of MARX andEngels became the basis of the economic economic andpolitical system
Class Struggle: Communists believe every society is divided into social classes in conflict with each other. In an industrial society, the main classes are: bourgeoisie the bourgeoisie (those who own the means of production) proletariat and the proletariat (workers).
Exploitation of Workers: The rich prosper from the labor of their workers, who live in poverty. Ownerscheat Owners cheat the workers by taking most of the wealth they produce, leaving them with barest minimum needed to survive.
Communist Revolution: Communistsbourgeoisienever Communists believe the bourgeoisie will never give up their power willingly give up their power. workers The plight of workers will become so WORKERS desperate that the WORKERS will eventually join togetherstart a violent REVOLUTION join together and start a violent REVOLUTION overthrowbourgeoisie. to overthrow the bourgeoisie.
Dictatorship of the Proletariat : Workers Workers will establish a society in which they jointly own the means of production. All citizens will be equal, sharing the fruits of their labor. Class struggles will end. Government will become unnecessary and “wither away.”