2 Economic SystemsAn economic system describes how a country organizes its economy.Because of the problem of scarcity, every country needs a system to determine how to use its productive resourcesScarcity = limited resourcesAn economic system must answer three basic questions
3 Basic Economic Questions WHAT TO PRODUCE? (What kinds of goods and services should be produced?)HOW TO PRODUCE? (What productive resources are used to produce goods and services?)FOR WHOM TO PRODUCE? (Who gets to have the goods and services? How are the goods/services delivered?)
4 Types of Economic Systems 1. Traditional Economy2. Command Economy3. Market Economy* Most countries are a combination of economic systems…Mixed Economies!
5 Traditional EconomyAn economic system in which economic decisions are based on customs and beliefsPeople will make what they always made & will do the same work their parents didExchange of goods is often done through bartering: trading without using money
6 How to produce goods & services? What to produce?People decide and follow their customs and make what their ancestors madeHow to produce goods & services?People grow & make things the same way that their ancestors didFor whom are the goods & services produced?People in the village who need them
8 Government makes all economic decisions and owns most of the productive resources or property Governmental planning groups determine such things as the prices of goods/services & the wages of workersThis system has historic roots in countries with communist or centralized authoritarian governments
9 How to produce goods and services? What to produce?Government makes all economic decisions based on the needs of the country’s economy (not consumer need)How to produce goods and services?Government decides how to make goods and services – and owns the factories and means of productionFor whom are the goods/services produced?Government decides – prices are regulated but the choice of goods/services available to the consumer is limited
10 Countries with communist governments have Command economies There are no pure command economic systems, but countries North Korea and Cuba are close*China and Russia had strong command economies but have moved away from this system somewhat and now they have more of a Mixed Economy.
11 An economic system in which basic economic questions are answered by exchanges in the marketplace [producers and consumers] – not the governmentMost productive resources are owned by private citizensEconomic decisions are based on Free Enterprise (competition between companies)This system is sometimes called capitalism
12 How to produce goods and services? What to produce?Decisions based on supply and consumer demandThe government does not tell a business what goods or services to produce/offer or what prices to chargeHow to produce goods and services?Businesses decide how to produce goods/services efficiently and for a profitFor whom are the goods/services produced?consumers
13 Market EconomyThere are no truly pure Market economies, but the United States is close.
14 In a truly free market economy, the government would not be involved at all There would be no laws to protect workers from unfair bosses or no minimum wageThere would be no rules to make sure that consumer rights were properly protectedThere would be no government owned businesses (like the US Postal Service)Many societies have chosen to have some rules to protect consumers, workers, and businessesThese rules reduce the freedoms that businesses have, but they also protect the workers and consumers and create a Mixed Market Economy
15 Who decides what to produce? businessesWho decides how to produce goods and services?Businesses, however, the government creates some regulations and laws particularly for worker safety, wages, and rightsFor whom are the goods and services produced?consumers
16 Mixed EconomiesMost democratic countries fall in this category (there are no truly pure Market or Command economies).Examples: Brazil, Mexico, Canada, UK, US, Germany, Russia, Australia, etc.