Microeconomics is the study of how individuals and businesses make decisions on how to use limited resources. Macroeconomics is the study of how whole countries make these decisions.

Some basic vocabulary  Consumption is the using or consuming of a product or service. Distribution deals with how this product or service will be delivered to the people who will use it. Production deals with the manufacturing of a product or service.

The way a country chooses to answer these basic questions will determine what kind of economic system that country has. Economic Systems All countries have to answer the same basic decisions about how to use the limited resources they have: 1) What kinds of goods or services should be produced? (production) 2) How much of this product or service will be produced for people to use? (consumption) 3) Who will get these products or services? (distribution) 4) How will these goods or services be produced?

In a traditional economy, all economic decisions are based on tradition--we’ll do this year what we’ve done before, even if it didn’t work that well. There is little competition in a traditional economy, and everyone has a role to perform. However, nothing new is ever tried, and the economy doesn’t grow with new ideas or products.

A Free market economy is controlled by the forces of supply and demand. In a free market system, the people are allowed to own private property and resources. Since they own the factors of production, the consumers are able to make their own decisions about what products will be produced, what will be demanded, and what the price will be.

Consumer sovereignty ~ the idea that the people determine through purchases what goods and services will be produced

Free market economies are based on two ideas, competition and profit. Since anyone can own the factors of production, anyone can go into business in search of a profit. But…in a purely free system, everything is for sale.

The free market economy was first described in a 1776 book called The Wealth of Nations by Adam Smith. Free market economies are sometimes referred to as capitalist economies. Many nations today have some form of a capitalist economy. Smith described how supply and demand and consumer choice would govern a free economy.

A Command economy is controlled entirely by the government. All economic decisions are centrally planned by the government. The government decides what will be produced, how much, and who will get it. The government owns ALL of the factors of production.

Because there is no competition, and the government decides what to make and how much, there is very little variety in a command economy. Since the government makes all the decisions in a command economy, the economy can respond very quickly to changing needs. But because there is no competition, goods are poorly made and shortages are common.

This command system was first loosely describes by two men, Karl Marx and Frederick Engels, in a series of essays in 1848 called The Communist Manifesto.

Command economies are sometimes referred to as communist economies. China, Cuba, and North Korea are primarily command economies.

Nearly all countries in the world mix these two main systems together. They are Mixed economies. In a mixed economy, the people and the government share in the economic decision-making. Most of the factors of production are privately owned, but the government plays an important role regulating and guiding the economy.

Mixed economies allow the consumers to get the products and services they want at the right price, and government regulation prevents businesses from abusing or cheating workers and consumers.