1. ECONOMIC SYSTEMS Chapter 2
TRADITIONAL
COMMAND
MARKET

2. TRADITIONAL
Allocation of scarce resources by ritual, custom, or habit, e.g. hunter-gatherer societies
An economy in which the basic economic questions are answered by custom & tradition
Individuals not free to make decisions based on what they want
Roles defined by customs of ancestors
Economic decisions are based on how they were made in the past
Economy is self-sufficient and mostly make things necessary to survival

3. TRADITIONAL No specialization or division of labor
Producers are their own consumers
Bartering, instead of money
No real changes in technology
Examples: the Amish, Indian cultures in Central & S America

4. TRADITIONAL Strengths: Everyone has defined role
Little uncertainty over how, what, for whom
Weaknesses:
Discourages innovation
Discourages satisfaction of personal wants; tends to have lower standard of living

5. COMMAND Economy controlled by the government
Government owns all factors of production (resources, factories, railroads, etc.)
Economic decisions are made by the central government – at the top & people expected to follow
State can shift resources at will to focus on new priorities
a/k/a CENTRAL PLANNING; characteristic of communist countries
Interdependent: much specialization and division of labor

6. COMMAND
Examples: former Soviet Union, Cuba, Iraq, early People’s Republic of China
Strengths:
Can change direction very quickly
Planning agencies can shift resources quickly on a massive scale
Labor shortages solved by forcing redirection of workers

7. COMMAND Weaknesses: Does not meet needs and wants of individuals
Few consumer goods and very long waits
Little incentive to work – low pay
(“We pretend to work & they pretend to pay us)”
People keep jobs for life – no incentive to work hard
Large decision-making bureaucracy – out of touch and slow
Does not move quickly to solve day to day problems
Discourages innovation

9. MARKET ECONOMY
Privately-owned capital goods are used to produce all goods and services without significant government intervention
People and companies act in own self interest to answer “What, How, For Whom”
Economics decisions are based on supply & demand
Markets allow buyers & sellers to come together
Entrepreneurs
Interdependent: much specialization and division of labor
Highest standard of living
a/k/a Capitalism & Free Enterprise

10. MARKET Highest production and sale of consumer goods
Examples: U.S., Canada, Japan, Great Britain…
Strengths:
Can adjust to change over time – gradual
Change not prohibited or discouraged
Decision making decentralized- resources directed to where consumers want them
Huge variety of goods and services
Freedom for everyone involved - people decide their own “What, How, For Whom” with relatively little government interference

11. MARKET
Weaknesses:
People may be caught without work as the “For Whom” question is not always clear.
Young and sick may not get support as they are unproductive
Markets don’t always function optimally – need competition, resources free to move around, need good market information
Public goods not naturally provided

12. U.S. ECONOMY Mixed A Modified Private Enterprise Economy
Capitalism modified by government intervention and regulation
So… market mixed with command.
What is the current mix?
What is the role of the consumer in the U.S. economy?
Consumer Sovereignty – consumers rule!
What is the role of government?
Protector, provider & consumer, regulator, promotes national goals
Protector – can’t discriminate, misleading ads, safe food, etc.
National goals – social security, child labor, minimum wage, etc.

13. 5 CHARACTERISTICS: Economic Freedom Voluntary exchange
Choices for consumers & businesses
Voluntary exchange
Buyers & sellers freely exchange in market transactions
Private property rights
Profit motive
Entrepreneurs
Competition
Only because private individuals own the factors of production – better goods, lower price

15. U.S. Economic & Social Goals Used to Evaluate Economic Performance
Economic Freedom – to make your own decisions
Economic Efficiency – get the most out of the scarce resources there are—no waste
Economic Equity – fairness! Equal pay for equal work, no false advertising, etc.
Economic Security – disability, retirement, social security
Full Employment – unemployment equals poor economy
Price Stability – NO inflation….particularly harsh for those on “fixed incomes”
Economic growth – to achieve the “American dream”

16. Conflicts in Goals
Society evaluates costs and benefits of each to promote one over the other
What goals would be in conflict with a minimum wage increase?
How do you resolve the conflict?
Cost v. benefit analysis
Elect the person to office who agrees with you
Equitable thing to do BUT could do more harm than good – cost producers more – and restricts choice of employers to pay what they think is a fair wage