Economic SystemsEconomic Systems

UNIT FOUR NOTESUNIT FOUR NOTES

Economic SystemsEconomic Systems An An economic system economic system describes how a describes how a

country’s economy is organizedcountry’s economy is organized Because of the problem of Because of the problem of scarcityscarcity, every , every

country needs a system to determine how to country needs a system to determine how to use its productive resourcesuse its productive resources

An economic system must answer 3 An economic system must answer 3 basic questions…basic questions…

Economic SystemsEconomic Systems WHAT TO PRODUCE? WHAT TO PRODUCE? (What kinds of goods and (What kinds of goods and

services should be produced?)services should be produced?)

HOW TO PRODUCE? HOW TO PRODUCE? (What productive resources (What productive resources are used to produce goods and services?)are used to produce goods and services?)

FOR WHOM TO PRODUCE? FOR WHOM TO PRODUCE? (Who gets to have the (Who gets to have the goods and services?goods and services?

Four Types of Economic Four Types of Economic Systems:Systems:

1. Traditional Economy1. Traditional Economy

2. Command Economy2. Command Economy

3. Market Economy3. Market Economy

4. Mixed Economy (Market + Command)4. Mixed Economy (Market + Command)

Traditional EconomyTraditional Economy An economic system in which economic An economic system in which economic

decisions are based on customs and decisions are based on customs and beliefsbeliefs

People will make what they always made People will make what they always made & will do the same work their parents did& will do the same work their parents did

Exchange of goods is done through Exchange of goods is done through BarteringBartering: trading without using money: trading without using money

Traditional EconomyTraditional Economy Who decides what to produce?Who decides what to produce?

People follow their customs and make what their People follow their customs and make what their ancestors madeancestors made

Who decides how to produce goods & Who decides how to produce goods & services?services? People grow & make things the same way that their People grow & make things the same way that their

ancestors didancestors did Who are the goods & services produced for?Who are the goods & services produced for?

People in the village who need themPeople in the village who need them

Traditional Economy Traditional Economy Examples:Examples:

Villages in Africa and South America Villages in Africa and South America the Inuit tribes in Canadathe Inuit tribes in Canada the caste system in parts of rural Indiathe caste system in parts of rural India the Aborigines in Australiathe Aborigines in Australia

Command SystemCommand System Government makes all economic decisions & Government makes all economic decisions &

owns most of the propertyowns most of the property Governmental planning groups determine such Governmental planning groups determine such

things as the prices of goods/services & the things as the prices of goods/services & the wages of workerswages of workers

This system has not been very successful & This system has not been very successful & more and more countries are abandoning itmore and more countries are abandoning it

Command EconomyCommand Economy Who decides what to produce?Who decides what to produce?

Government makes all economic decisionsGovernment makes all economic decisions Who decides how to produce goods and Who decides how to produce goods and

services?services? Government decides how to make goods/servicesGovernment decides how to make goods/services

Who are the goods and services produced Who are the goods and services produced for?for? Whoever the government decides to give them toWhoever the government decides to give them to

Command SystemCommand System Countries with communist governments have Countries with communist governments have

Command economiesCommand economies

Examples: North Korea, former Soviet Union, Examples: North Korea, former Soviet Union, CubaCuba

*Germany and Russia have moved away from *Germany and Russia have moved away from having a Command economy since 1991. Now having a Command economy since 1991. Now they have a Mixed economy.they have a Mixed economy.

Market EconomyMarket Economy An economic system in which production An economic system in which production

and distribution questions are answered and distribution questions are answered by prices and profits (supply and demand)by prices and profits (supply and demand)

Most of the resources are owned by Most of the resources are owned by private citizensprivate citizens

Economic decisions are based on Economic decisions are based on Free Free EnterpriseEnterprise (competition between (competition between companies)companies) Important economic questions are not Important economic questions are not

answered by gov. but by individualsanswered by gov. but by individuals Gov. does not tell a business what goods to Gov. does not tell a business what goods to

produce or what price to chargeproduce or what price to charge

Market EconomyMarket Economy Who decides what to produce?Who decides what to produce?

Businesses base decisions on supply and demand Businesses base decisions on supply and demand and free enterprise (PRICE)and free enterprise (PRICE)

Who decides how to produce goods and Who decides how to produce goods and services?services? Businesses decide how to produce goodsBusinesses decide how to produce goods

Who are the goods and services produced Who are the goods and services produced for?for? consumersconsumers

Market EconomyMarket Economy There are no truly pure Market There are no truly pure Market

economies, but the United States is economies, but the United States is close.close.

In a truly free market economy, the government would In a truly free market economy, the government would not be involved at allnot be involved at all There would be no laws to protect workers from unfair There would be no laws to protect workers from unfair

bossesbosses There would be no rules to make sure that credit cards were There would be no rules to make sure that credit cards were

properly protectedproperly protected

Many societies have chosen to have some rules to Many societies have chosen to have some rules to protect consumers, workers, and businesses (MIXED)protect consumers, workers, and businesses (MIXED) These rules reduce the freedoms that businesses have, but These rules reduce the freedoms that businesses have, but

they also protect the workers and consumersthey also protect the workers and consumers

Mixed EconomyMixed Economy Market + Command = MixedMarket + Command = Mixed There are no pure command or market economies. There are no pure command or market economies.

To some degree, all modern economies exhibit To some degree, all modern economies exhibit characteristics of both systems and are often referred to characteristics of both systems and are often referred to as mixed economies. as mixed economies.

Most economies are closer to one type of economic Most economies are closer to one type of economic system than anothersystem than another

Businesses own most resources and determine Businesses own most resources and determine what and how to produce, but the government what and how to produce, but the government regulates certain industriesregulates certain industries

Mixed EconomyMixed Economy Who decides what to produce?Who decides what to produce?

businessesbusinesses Who decides how to produce goods and Who decides how to produce goods and

services?services? Businesses, but the government regulates certain Businesses, but the government regulates certain

industriesindustries Who are the goods and services produced for?Who are the goods and services produced for?

consumersconsumers

Mixed EconomiesMixed Economies Most democratic countries fall in this Most democratic countries fall in this

category (there are no truly pure Market category (there are no truly pure Market or Command economies).or Command economies). Examples: Brazil, Mexico, Canada, UK, US, Examples: Brazil, Mexico, Canada, UK, US,

Germany, Russia, Australia, etc.Germany, Russia, Australia, etc.

Economy ContinuumEconomy ContinuumCommand Market

Cuba Russia Germany USAustralia

UK

Which Economic System Is Which Economic System Is Best?Best?

Market system has proven to be best Market system has proven to be best because it promotes the goals of growth, because it promotes the goals of growth, freedom, & efficiencyfreedom, & efficiency Citizens are free to own their own property and Citizens are free to own their own property and

use it in the most efficient and profitable wayuse it in the most efficient and profitable way Command and Traditional systems Command and Traditional systems

sometimes offer more security, but are not sometimes offer more security, but are not nearly as strong in efficiency, growth, nearly as strong in efficiency, growth, freedom, and environmental qualityfreedom, and environmental quality