Economic Systems
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Economic Systems
There are three fundamental questions of economics:1. WHAT is produced?2. HOW is it produced?3. WHO consumes what is produced?
WHAT is produced?If resources are limited…
Should a local government use resourced to build a new school, repair an old highway, or construct a new recreation center?
Should American producers use resources to make goods for national defense or to provide services for retired people who are too old or ill to work?
Should a farmer grow wheat, cotton, or lettuce?
HOW is it produced?How should we obtain crude oil to meet our energy
needs?How much pollution should we allow firms to generate
when producing goods?How should hogs be raised before they become food?
WHO consumes what is produced?Who should receive the limited supply of flu vaccinations?Who should benefit from the construction of a new school?Who should a shoe manufacturer market their product toward?
Who decides how to answer these questions?In the United States, consumers (people), producers (businesses), and governments (local, state, and federal) all have input.
However, not all economic systems are alike in that respect.
So what is an economic system?economic system - a particular set of social institutions which deals with the production, distribution, and consumption of goods and services in a particular society.
So what is an economic system?All societies face the same fundamental questions of economics, but societies answer these questions in different ways.
The way these questions are answered determines the the type of economic system of that society.
There are four basic economic systems:1. Traditional2. Command3. Market4. Mixed
Traditional Economy
Key image:
The Village Market
The Bush Market by Anju Walters
Traditional Economy
This is the oldest economic system.
Tradition and custom govern economic decisions.
Traditional Economy
Economic activities are usually centered toward the family, tribe, or ethnic group.
Barter (trading one thing for another) is often used in place of currency (money).
Traditional Economy
Farming, hunting, and gathering are done largely in the same fashion as the generation before.
Traditional Economy
There is little to no use of technology.
Traditional Economy
Choices are determined largely by environmental factors.
Traditional Economy
Resources are often allocated based on inheritance.
Traditional Economy Advantages:● Little friction among
members because there is little competition
● Individual roles are clearly defined
● System is generally well-understood by participants
Disadvantages:● Does not allow for growth and development● Changes are slow● There is little social mobility (your role is
determined by birth● Does not take advantage of technology● Individuals often have no control over
environmental factors
Market EconomyKey Image:Kid in a Superdupermarket
Key terms:CompetitionIndividualChoice
Market Economy - Healthy Competition
❏ Profit is the primary objective of production.
❏ Competition determines price and increases the quality of products.
Market Economy - Healthy Competition
Market Economy - Healthy CompetitionThe absence of competition is an economic system is called a monopoly.
Because monopolies leave consumers with no choice, monopolies typically lead to higher prices and lower quality.
Market Economy - It’s all about the INDIVIDUAL
Economic decisions are made by INDIVIDUALS competing to earn profits based on supply and demand.
Market Economy - It’s all about the INDIVIDUALResources are owned by INDIVIDUALS.
Market Economy - It’s all about the INDIVIDUAL
INDIVIDUAL freedom is considered very important; individuals have freedom to make economic decisions.
Market Economy - It’s all about the INDIVIDUAL
INDIVIDUALS can choose between a variety of products and producers.
Market Economy - Pros and ConsAdvantages:● Prices are determined by market forces (supply and
demand); competition brings down prices.● Consumers can buy whatever they like in whatever
quantities they like.● There is a great variety of goods and services.● Little government intervention.● Adjusts to change easily.
Market Economy - Pros and ConsDisadvantages:● It does not always provide the basic needs of everyone in
society, which can lead some people to slip into poverty.● It may make it difficult for government to provide
adequate social services.● There are occasional market fluctuations and even
failures.● People can make choices which are harmful to
themselves and others.
Command EconomyKey Image:Minions at work
Key Terms:CollectiveGovernmentQuota
Command Economy - We’re all in this together.The focus is on the collective (the good of society as a whole, or the greatest good for the greatest number).
Individual freedom is not as important and individuals have little, if any, influence over economic functions.
Command Economy - We’re all in this together.
There is no competition; the purpose of business is to provide goods and services, not to make a profit.
Command Economy - We’re all in this together.
Factories are concerned with quotas - official limits on the number or amount of people or things that are allowed.
Command Economy - Who’s in Charge?Resources are owned by the government.
The government (or other central authority) makes all economic decisions.
The government sets the prices of goods and services.
Command Economy - AdvantagesIt can ensure stability because it does not coincide with business cycles.
It focuses on equality, serving people collectively instead of as individuals and distributing wealth among all in society.
The products produced fulfill needs; there is little waste or excess.
Command Economy - DisadvantagesOften there is insufficient resource distribution, i.e. shortages and/or surpluses.
It cannot determine society’s objectives and consumer’s preferences as well as a Market Economy can.
It cannot easily adjust to change.
Command Economy - DisadvantagesIt infringes on personal freedoms.
Consumers have few, if any, choices in the marketplace.
There are few, if any, incentives for innovation.
It often leads to corruption among state planners.
Mixed EconomyKey Image:Liger
The Mixed Economy is a hybrid blend of economic systems.
Mixed EconomyCombines elements of pure market and command economies; Government and individuals share the economic decision making process.
Mixed EconomiesThe government guides and regulates production of goods and services.
Mixed EconomiesThe government guides and regulates production of goods and services.
Mixed EconomiesThe government guides and regulates production of goods and services.
Mixed EconomyResources are owned by individuals.
Mixed EconomyGovernment serves to protect both producers and consumers from unfair policies and practices.
Mixed Economy - Pros and ConsAdvantages:● It has some advantages of both the
Market and Command systems.● It can focus on social welfare and political
freedom as well as individual liberties.
Mixed Economy - Pros and ConsDisadvantages:● It has many of the same disadvantages of
both the Market and Command systems.● It may not lead to an optimal use of
resources.● Government intervention can hinder
progress.
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