Economic Understandings SS6E8 The student will analyze different economic systems. Compare how traditional, command, and market economies answer the economic questions of 1-what to produce, 2-how to produce, and 3-for whom to produce

Answering Economic Questions Scarcity is the limited supply of something. Every country must deal with the problem of scarcity. No country has everything that its people want and need. As a result, every country develops an economic system to determine how to use its limited resources to answer the three basic economic questions.

What goods and services will be produced? How will goods and services be produced? Who will consume the goods and services? The way a society answers these questions will determine its economic system.

Traditional Economy In a traditional economy, the customs and habits of the past are used to decide what and how goods will be produced, distributed, and consumed. In this system, each member of the society knows early in life what his or her role in the larger group will be. Since jobs are handed down from generation to

Generation, there is very little change in the system over generations. In a traditional economy, people are depended upon to fulfill their traditional role. If some people are not there to do their part, the system can break down. Farming, hunting and gathering, and cattle herding are often a part of a traditional economy.

This type of economy was found in the culture of the Aborigines in Australia.

Command Economy In a centralized command economy, government planning groups make the basic economic decisions. They determine such things as which goods and services to produce, the prices, and wage rates. Individuals and corporations generally do not own businesses or farms; these are owned by the government.

Workers at a business are told what to produce and how much to produce in a given time. This is called a quota. The government’s goal is to assign quotas to all workers. The expectation is that when all workers meet all quotas, everyone in the country will be able to have the goods they need when they need them.

The government of Australia controlled one part of the economy in the past. Government-owned companies controlled telecommunications. The government set the price for having a phone, the cost of calls, and wages that were the same in all parts of the country.

In 1989, the company was made into a private business with stockholders owning the company.

Market Economy In a decentralized market economy, decisions are guided by changes in prices that occur between individual buyers and sellers in the marketplace. Other names for market systems are ---free enterprise, capitalism, and laissez-fair.

In a market economy, individuals or corporations generally own businesses and farms. Each business or farm decides what it wants to produce. The law of supply and demand determines the price people pay for things. Supply- is the amount of goods available. Demand- is how many consumers want the goods.

Australia operates in a market economy. It is considered one of the most free economies in the world. Businesses operate without too many rules from the government.

People are free to start a business and can do so quickly. Courts use the laws of Australia to protect the property rights of citizens.

Mixed Economy SS6E8 The student will analyze different economic systems. b. Explain how most countries have a mixed economy located on a continuum between pure and market and pure command.

There are no pure command or market economies. All modern economies have characteristics of both systems and are mixed economies. However, most economies are closer to one type of economic system than another.

In a truly free market economy, for example, the government would not be involved at all. There would be no law to protect workers from unfair bosses. There would be no rules to make sure that credit cards were properly protected. Many societies have chosen to have some rules to protect consumers, workers, and businesses.

These rules reduce the freedoms that businesses have, but they also protect the workers and consumers. The following diagram shows some world economics on a scale. The ones on the left are most restricted. The ones on the right are most free.

Mixed Economy Continuum Command Market Economy Economy <________________________> ^ ^ ^ ^ ^ Cuba Russia Germany USA Australia

Quiz Yourself In Australia, who decides which goods will be produced and sold? a. citizens b. the monarch c. business owners d. the prime minister

2. What type of economic system was used by the Aborigines? a. capitalism b. command economy c. traditional economy d. market economy

Mixed Economy Continuum Command Market Economy Economy <________________________> ^ ^ ^ ^ ^ Cuba Russia Germany USA Australia

3. Which country shown in the above diagram has the freest economy? a. Australia b. Cuba c. Germany d. United States

4. Because most economies have characteristics of the command and market economy, we say they are… a. communist b. free c. hybrid d. mixed