1. Economic Systems

2. Economic Systems
An economic system describes how a country’s economy is organized
Because of the problem of scarcity, every country needs a system to determine how to use its productive resources
Scarcity = not having enough of something
An economic system must answer 3 questions…

3. The 3 Economic Questions (3E?’s)
WHAT TO PRODUCE? (What kinds of goods and services should be produced?)
HOW TO PRODUCE? (What productive resources are used to produce goods and services?)
FOR WHOM TO PRODUCE? (Who gets to have the goods and services?

4. Three Types of Economic Systems:
1. Traditional Economy
2. Command Economy
3. Market Economy
* Most countries are… Mixed Economies! (Market + Command)

5. Traditional Economy
An economic system in which economic decisions are based on customs and beliefs
People will make what they always made & will do the same work their parents did
Exchange of goods is done through Bartering: trading without using money

6. How a Traditional Economy answers the 3E?’s
Who decides what to produce?
People follow their customs and make what their ancestors made
Who decides how to produce goods & services?
People grow & make things the same way that their ancestors did
Who are the goods & services produced for?
People in the village who need them

7. Traditional Economy Examples: Villages in Africa and South America
the Inuit tribes in Canada
the caste system in parts of rural India
the Aborigines in Australia

8. Positives of a traditional economy
Predictable
Knowing what your job will be
Knowing the way you will live

9. Problems with a traditional economy
Lack many resources
Only produce enough to live on

10. Command System
Government makes all economic decisions & owns most of the property
Governmental planning groups determine such things as the prices of goods/services & the wages of workers
This system has not been very successful & more and more countries are abandoning it

11. How a Command Economy answers the 3E?’s
Who decides what to produce?
Government makes all economic decisions
Who decides how to produce goods and services?
Government decides how to make goods/services
Who are the goods and services produced for?
Whoever the government decides to give them to

12. Command System
Countries with communist governments have Command economies
Examples: There are no truly pure command economic systems, but close countries are: North Korea, former Soviet Union, Cuba
*Germany and Russia have moved away from having a Command economy since Now they have a Mixed economy.

13. Positives of a command economy
Because the government makes the decisions, people don’t have to worry about employment, housing, education, and healthcare

14. Problems with a command economy
Consumers get low priority
Little freedom of choice
All resources are owned by the government

15. Market Economy
An economic system in which production and distribution questions are answered by prices and profits (supply and demand)
Most of the resources are owned by private citizens
Economic decisions are based on Free Enterprise (competition between companies)
Important economic questions are not answered by gov. but by individuals
Gov. does not tell a business what goods to produce or what price to charge

16. How a Market Economy answers the 3E?’s
Who decides what to produce?
Businesses base decisions on supply and demand and free enterprise (PRICE)
Who decides how to produce goods and services?
Businesses decide how to produce goods
Who are the goods and services produced for?
consumers

17. Market Economy
There are no truly pure Market economies, but the United States is close.

18. In a truly free market economy, the government would not be involved at all
There would be no laws to protect workers form 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 (MIXED)
These rules reduce the freedoms that businesses have, but they also protect the workers and consumers

19. Positives of a market economy
People can start their own businesses
People have choice

20. Problems with a market economy
The desire for money may lead to poor quality of goods and services
Business owners have to risk losing money

21. Mixed Economy Market + Command = Mixed
Businesses own most resources and determine what and how to produce, but the government regulates certain industries
There are no pure command or market economies.
To some degree, all modern economies exhibit characteristics of both systems and are often referred to as mixed economies.
Most economies are closer to one type of economic system than another

22. How a Mixed Economy answers the 3E?’s
Who decides what to produce?
businesses
Who decides how to produce goods and services?
Businesses, but the government regulates certain industries
Who are the goods and services produced for?
consumers

23. Mixed Economies
Most democratic countries fall in this category (there are no truly pure Market or Command economies).
Examples: Brazil, Mexico, Canada, UK, US, Germany, Russia, Australia, etc.

24. Continuum of Economies
Pure Command
Pure Market
No Individual freedom
Most Individual freedom
Most economies fall in between a pure market and a pure command economy on the continuum

25. Economy Continuum
Command
Market UK
Germany
Russia

26. Which Economic System Is Best?
Market system has proven to be best because it promotes the goals of growth, freedom, & efficiency
Citizens are free to own their own property and use it in the most efficient and profitable way
Command and Traditional systems sometimes offer more security, but are not nearly as strong in efficiency, growth, freedom, and environmental quality