2. Critical Questions “Introduction to Economic Systems” Critical Questions What key economic questions must every society answer? What basic economic goals do societies have? What types of economic systems exist today?

3. What is an economic system? The method used by a society to produce and distribute goods and services

4. The Three Basic Economic Questions that Determine a Societies Economic System Because ALL economic resources are scarce, every society must answer three questions: –What goods and services should be produced? Guns or butter? –How should these goods and services be produced? What combination of factor resources should we use? –Who consumes these goods and services? How will income be distributed?

5. Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services.

6. An economic system is the method used by a society to produce and distribute goods and services. Four Economic Systems Traditional economies rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it. In a Command economy the central government makes all decisions about the production and consumption of goods and services. In a Market economy economic decisions are made by individuals and are based on exchange, or trade. Mixed economies are systems that combine tradition and the free market with limited government intervention.

7. Comparing Economic Systems Economic System Traditional Market Command Mixed Who answers the 3 ?’s Customs Individuals Central Government Individuals with some government involvement

8. Traditional Economy Found in rural, under- developed countries– –Vanuatu –Pygmies of Congo –Eskimos & Indian tribes –Belarus Customs govern the economic decisions that are made Farming, hunting and gathering are done the same way as the generation before Economic activities are centered around the family or ethnic unit Men and women are given different economic roles and tasks Advantages: people have specific roles; security in the way things are done Disadvantages: Technology is not used; difficult to improve

9. Command Economy The government (or central authority) determines what, how, and for whom goods and services are produced. There are no pure Command Economies…the closest would be Communism Advantages –Guarantees equal standard of living for everyone –Less crime and poverty –Needs are provided for through the government Disadvantages –Minimal choices –Fewer choices of items –No incentive to produce better product or engage in entrepreneurship Also known as a Planned or Managed Economy

10. Command economies face problems of poor-quality goods, shortages, and diminishing production.

11. Other Problems in Centrally Planned Economies Performance falls short of the set ideals Fail to meet consumer needs and wants Little individual incentives to work hard Lack of improvement Expensive and inflexible government structure needed to manage the system Sacrifice of individual freedoms to pursue societal goals

12. Market Economy (Free Enterprise) Also called a Free Market Economy or Free Enterprise Economy Businesses and consumers decide what they will produce and purchase and in what quantities Decisions are made according to law of supply & demand Supply and demand of goods and services determine what is produced and the price that will be charged. Advantage—competition to have the best products and services Disadvantage—huge rift between wealthy and poor Note: a true market economy does not exist.

13. Free Markets monetary flow physical flow monetary flow physical flow Circular Flow Diagram of a Market Economy Households Firms In a free market economy, households and business firms use markets to exchange money and products.In a free market economy, households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services.Households own the factors of production and consume goods and services.

14. Advantages of the Market Economic Efficiency As a self-regulating system, a free market economy is efficient. Economic Growth Because competition encourages innovation, free markets encourage growth. Economic Freedom Free market economies have the highest degree of economic freedom of any economic system. Additional Goals Free markets offer a wider variety of goods and services than any other economic system.

15. Mixed Economies It is doubtable that any nation can exist successfully under a pure command economy or a pure market economy. Most economies mix features of both systems.

16. Mixed Economy Combination of a market and a command economy Government takes care of people’s needs Marketplace takes care of people’s wants. Advantage —balance of needs and wants met by government and in marketplace Disadvantage —citizens have to pay taxes United States, England, Australia, Japan, China…yes even China! Most nations have a mixed economy

17. In a mixed economy, the government owns both land and capital. The government and the market decide what to produce, how much to produce, and how much to charge. Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society. Communism is a political system characterized by a centrally planned economy with almost all economic and political power resting in the hands of the government. Communist governments are authoritarian in nature. Organization of Mixed Economies

18. Capitalism Most decisions are made by individuals and businesses with a focus on minimal government interference. Government involvement is in terms of regulations (laws), and services considered to be essential. Is the type of mixed economy with the least amount of government involvement.

19. Continuum of Mixed Economies Centrally plannedFree market Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick Iran North Korea Cuba China RussiaGreecePeruUnited States South AfricaFranceUnited Kingdom BotswanaCanadaSingapore Hong Kong An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations. Nations are placed on a continuum (a range with no clear divisions) of mixed economies. On one end are centrally planned economies and on the opposite end are free markets economies. Comparing Mixed Economies