Economic Systems Notes

Economic SystemsEconomic Systems

UNIT TEN NOTESUNIT TEN 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?

The way a society answers these questions The way a society answers these questions determines its economic system.determines its economic system.

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; the Villages in Africa and South America; the

Inuit tribes in Canada; the caste system in Inuit tribes in Canada; the caste system in parts of rural Indiaparts of rural India

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 Governmental planning groups determine

such things as the prices of goods/services & such things as the prices of goods/services & the wages of workersthe wages 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 Government decides how to make

goods/servicesgoods/services

Who are the goods and services Who are the goods and services produced for?produced 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: Cuba, former Soviet Union, North Examples: Cuba, former Soviet Union, North KoreaKorea

*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 economic An economic system in which economic

decisions are guided by the changes in decisions are guided by the changes in prices that occur as individual buyers and prices that occur as individual buyers and sellers interact in the market placesellers interact in the market place

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 Businesses base decisions on supply and

demand and free enterprise (PRICE)demand 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.

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 characteristics of both systems and are often referred to as referred to as mixedmixed economies. economies. Most economies are closer to one type of Most economies are closer to one type of

economic system. than anothereconomic system. 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 Who are the goods and services produced for?for? consumersconsumers

Mixed EconomyMixed Economy

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, Examples: Brazil, Mexico, Canada, UK, etc.etc.

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