2 How Does An Economy Work? Nations must answer 3 basic Economic question:What goods and services should be produced?How should the goods and services be produced?For who should the goods and services be produced?The way a nation answers these questions defines their economy.
3 Types of Economic Systems All economic systems fall into one of two broad categories:Market (or Capitalist) SystemCommand (or Planned) SystemNo economy can be purely market or purely commandElements of both economies are found in all systems this makes all economies mixed
4 A Pure Market Economy No government involvement in economic decisions The government lets the people answer the three basic economic questionsWhat? Customers decide through their purchasesHow? This is left up to the individual business –BUT- a business must be profitableWho? People who have money can buy more – this encourages hard work and investments
5 A Pure Command EconomyThe Government controls the factors of production and makes all the decisions The government is responsible for answering thethree economic questionsWhat? One person ( a dictator) or a group of government officials (central planning committee) decide what is to be producedHow? The government owns all the factors of production and makes all the decisions about productionWho? The government decide who receives what is produced in the economy
6 Mixed EconomiesSome government involvement through mandatory laws and regulations that businesses followLabor Laws, Minimum WageThe government provides social programs for those who need helpMedicare, welfareAll economies are mixed they are classified based on how much the government is involved in the process
7 Continuum of Economic Systems Market EconomyCapitalismOn the far rightCommand EconomyCommunismOn the far leftSocialismLeft of center but right of communism
8 CapitalismAn economic system characterized by private ownership of businesses and marketplace competitionThe government is concerned about its people and takes care of those who cannot care for themselvesThe political system is a democracy with leaders elected by the peopleThe United States and Japan are examples of a Capitalist Economy
9 SocialismIncreased government involvement in people’s lives and the economyThe main goal is to keep prices low for all people and to provide employment for manyThe government runs key industries and makes economic decisionsMore social services for all and free or low cost medical careCanada, Germany, Sweden, Australia and Great Britain are all examples of socialist economies
10 Communism The government runs everything (Totalitarian government) Only one political party, the Communist party, runs the governmentAll people able to work are assigned jobs – there is virtually no unemploymentThe government assigns housing, schools, and occupationsThere is little to no economic freedomCuba, North Korea, and China are examples
11 Economies In Transition The breakup of the Soviet Union is the best example of a country changing from a Command Economy to a Market EconomyState owned industries have been privatized (government owned businesses are sold to private citizens)Today even socialist countries are selling some of their government owned businesses to individuals
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