Economic Systems

Section 1 Vocab Economy Economic System Traditional Economy Command Economy Market Economy

Economy Economic System An organized way of providing for the wants and needs of people.

3 types of Economies Traditional economy = Allocation of scarce resources and nearly all other economic activity stems from rituals, habit or customs.

Traditional Economy ADVANTAGES Little uncertainty exists on what to produce, how to produce and who gets the products. DISADVANTAGES Tends to discourage new ideas and ways of doing things.

3 types of Economies Command economy = Central authority makes the decisions of what, how, and who.

Command Economy ADVANTAGES Economy can change directions drastically in a relatively short time. Social programs are available to almost everyone. DISADVANTAGES Not designed to meet the wants and some needs of the people. No incentive to work hard. Requires a large, decision-making bureaucracy.

Command Economy DISADVANTAGES No flexibility to deal with day-to-day problems. Hard for new ideas or programs to get started.

3 types of Economies Market economy = People and firms act in their own best interests to answer the 3 basic economic questions.

Market Economy ADVANTAGES Can adjust to changes in the long run. High degree of individual freedom. (Make what you want) ADVANTAGES Relatively small amount of government interference. Decision making is decentralized (not in 1 place).

Market Economy ADVANTAGES Incredible variety of goods and services available. High degree of consumer satisfaction.

Market Economy DISADVANTAGES Does not provide for the basic needs of the society. Private industry does not provide enough services for society so the government must provide them. DISADVANTAGES Relatively high degree of uncertainty that workers and businesses face as a result of change. Market economics can fail. (Like now!)

Why Market Economies Fail 3 conditions must be met in order for market economies to be successful: 1.Markets must be relatively competitive. 2.Resources must be relatively free to move from one activity to another. 3.Consumers need access to adequate information about goods and services. Q  How does this relate to our current economic crisis?