Economic Systems

Four Basic Economic Questions Every society must answer four basic economic questions: What goods and services will be produced? How will these goods and services be produced? How much (or how many) will be produced? Who will get what is produced?

Traditional Economies Economy that usually exists with very simple societies. Decisions are based on customs and traditions. Things are done the way they have always been done. Land, tools, and equipment are owned by families and tribes. Children learn job skills from their parents. The same goods and services are produced generation after generation. Common only among small agricultural societies in Latin America, Asia, and Africa.

Advantages and Disadvantages Advantages: Stable Roles easily defined Disadvantages Limited choice Slow to develop

Command Economies Economy where decisions are made my a central authority (government= king, dictator, or political party). Land and capital goods controlled by the central authority. Individuals are expected to follow the policies and decisions of the central authority. Comparable to Communism or Socialism. The former Soviet Union would be a recent example.

Advantages and Disadvantages Advantages Decisions made quickly Needs of the country can be decided by the central authority Disadvantages Individuals have few incentives to work hard Need and wants not always met Power is in the hands of a few people

Market Economies Also referred to as capitalism or the private enterprise system. No one runs this economy. It runs itself. Most modern-day economies have a lot of the characteristics of a market economy. A market simply refers to the actions of buying and selling, not just the place where things are bought and sold.

Resource Market

Product Market

Advantages and Disadvantages Advantages Consumers and Producers making economic decisions People decide what’s in their best interests Producers free to produce what they wish in the way they wish Variety of goods and services Economy is flexible to meet the people’s needs Consumers are free to buy the goods and services they choose. Disadvantages Individuals unable to work can’t meet their own needs No guarantees of success Needs of society as a whole might be overlooked if people only work for their own benefit The economy is subject to ups and downs.

Modern Mixed Economies In the industrial nations of the world, pure command and market economies do not exist today. All industrial nations now have a combination of a market and command economies called Mixed Economies. The U.S., for example, has the basic features of a market economy, but it is not a pure market system. Our government regulates (controls) some parts of the economy.