Economic Systems

1-Economic Systems Economic system: An organized way of providing for the wants and needs of a society’s people. How society uses resources to satisfy people’s wants Four basic systems: Traditional Command Market Mixed

TRADITIONAL ECONOMIES Characteristics The use of scarce resources and other economic activity stems from ritual, habit or custom Individuals are not free to make decisions based on what they want or would like to have. Their roles are defined by the customs of their elders and ancestors.

TRADITIONAL ECONOMIES Traditional Economy Centers on families, clans, or tribes Good of the group always comes before individual desires Hunting: share the spoils with other families in even portions

Characteristics of Traditional Economies Examples Australian Aborigines Northern Canada’s Inuits

Characteristics of Traditional Economies Advantages Everyone knows which role to play. Little uncertainty regarding what to produce or how to produce. for whom to produce is determined by the customs and traditions of the society.

Characteristics of Traditional Economies Disadvantages Tends to discourage new ideas or ways of doing things. Strict roles have the effect of punishing people who act differently or break the rules. Lack of progress leads to economic stagnation and a lower standard of living than in other economic systems.

COMMAND ECONOMIES A central authority makes the major decisions about: What, How and for Whom to produce. Led by king, dictator, or president who make the economic decisions.

COMMAND ECONOMIES Characteristics The government makes the major economic decisions: if houses or apartments will be built, they determine the best way to build them and who will receive them. Severely limit property rights: people not allowed to own their own homes, businesses and other productive resources [some personal items and tools are permitted.

COMMAND ECONOMIES Characteristics   Individual freedom limited: Government decides what its universities should teach. Government tends to favor themselves when making economic decisions: favored with luxury goods for themselves, not their people,

Examples of COMMAND ECONOMIES North Korea Cuba USSR

Characteristics of COMMAND Economies Advantages Can change direction drastically. Many health and public services are available at little or no cost.

Characteristics of COMMAND Economies Disadvantages Ignores basic wants and needs of consumers; gives people incentive to fill quotas in production rather than producing a good product. Requires a large decision-making bureaucracy. The planning bureaucracy lacks the flexibility to deal with minor day-to-day problems. Rewards for individuals are rare

MARKET ECONOMIES People make decisions in their own best interest. A market is an arrangement that allows buyers and sellers to come together to exchange goods and services

MARKET ECONOMIES Characteristics A great deal of freedom: people spend their money on products they want most. This tells producers what products people want. Businesses are free to find the best production methods. Income that consumers earn and spend in the market determines for Whom to produce.

MARKET ECONOMIES Characteristics Private ownership of resources Based on capitalism: An economic system where private citizens own the factors of production

Characteristics of Market Economies Advantages High degree of individual freedom. Adjusts to change gradually over time. Relatively little government interference. Decision-making decentralized. Variety of goods and services. High degree of customer satisfaction.

Characteristics of Market Economies Disadvantages Does not provide for everyone. May be difficult for some people to survive. May not provide enough of some basic goods and services. High degree of uncertainty.

MIXED ECONOMIES Economic system that combines the elements of all three types: Traditional, Command and Market economies

MIXED ECONOMIES Disadvantages

MIXED ECONOMIES Advantages Provides assistance for people otherwise left out. If society has democracy, voters can use electoral power to affect what, how and for whom decisions.

MIXED ECONOMIES Disadvantages Costs for benefits can be high. Availability of services may be limited or the quality may deteriorate over time.