Comparative Economic Systems

Economic System  An economic system is the method used by a society to produce and distribute goods and services.

The Three Basic Economic Questions  Because of scarcity each economic system must answer three basic economic questions. These questions are:  What to produce?  How to produce?  For whom to produce?  Each economic system answers these questions in different ways.

Traditional Economic System  Economic system that relies heavily on habit, custom, or ritual to answer the three economic questions.  Traditional economies typically focus on one particular method of livelihood.  Economic roles are often passed from generation to generation.  Typically found in remote areas around the world.

Command Economic System  Economic system where the government answers the three basic economic questions.  Command economic systems are typically found within communist political systems.

Market Economic System  Economic system where individuals (consumers/demand) and businesses (sellers/supply) answer the three basic economic questions through voluntary exchange.  Capitalism and free enterprise are terms that are synonymous with a market economic system.

Adam Smith  He is considered to be the father of the market economic system. He articulated his ideas in the book Wealth of Nations (1776).  The primary thesis of Smith’s book was the idea of laissez faire. This means that the government should not intervene in the economy. He felt that the economy should be based upon voluntary exchange.

Supply (Voluntary Exchange)  Supply is the willingness of sellers to produce goods and provide services.  The law of supply tells us that suppliers are more willing to produce goods and provide services when they are able to charge a higher price.

Demand (Voluntary Exchange)  Demand is the willingness and ability of consumers to purchase goods and services.  The law of demand tells us that consumers are more willing and able to buy goods and services at lower prices.

Supply and Demand Equilibrium  The market system is based upon finding a price where the quantity supplied is equal to the quantity demanded.  This is called market equilibrium.  When the quantity supplied and the quantity demanded are not equal this is a condition called disequilibrium.  The actions of buyers and sellers will move the market towards equilibrium.  I will graph equilibrium and disequilibrium on the board.

Mixed Economic System  All modern economic systems are some type of mixed system. This means that the economic system combines elements from traditional, command, and market systems.  Some economic systems are more heavily based upon one of the basic forms of economic systems than the others.

The United States  The United States has a mixed economic system that is more heavily weighted towards a market system.  I’m going to draw an economic spectrum on the board with various countries and where they lie in relation to the command and market systems.