Introduction to Economic Systems
Personal Finance
Mr. Tumino
Discussion…
• How would you define economics?
• What is an economic system?
• How does economics impact you?
Comparative Economics Systems
• The major economic systems are traditional economy, market economy, command economy and mixed economy.
• There are also countries that are said to have developing economies, moving from a traditional to a market economy.
Definitions• Factors of production:
– Those things necessary to produce goods and services.
» Land
» Labor
» Capital (money, buildings, equipment, etc.)
» Management
Definitions
• Traditional economy:– An economic system in which the factors of
production are settled by rules accepted as good and correct
– Normally used to describe economic systems that pertain in societies with extensive subsistence agriculture
– Used by members of industrialized societies to describe societies deemed "underdeveloped"
Definitions
• Market economy:– An economy in which the prices of goods and
services are determined in a free price system.– A system in which buyers and sellers exchange
on the basis of supply and demand.– Also known as a capitalist economy.
Market Economy
Definitions
• Command economy:– An economic system in which decisions
regarding the factors of production are made by government leaders.
Command Economy
Command Economies
• Two types of command economies:
– Communist—strict government control of the entire society
Command Economies
– Socialist—three main goals of this type of economy:
• An equitable distribution of wealth and economic opportunity
• Society’s control, through its government, makes decisions about public goods.
• Public ownership of services and factories that are essential.
Definitions
• Mixed economy:
– A combination of market, command, or traditional economy.
– A system in which free enterprise is affected by government regulations.
Mixed Economy
Economic Decisions• All economic systems must make three basic
economic decisions:
– What and how many goods and services should be produced
– How should they be produced
– Who gets the goods and services that are produced
Economic Decision Making
• These decisions are made differently in the three major economic systems:
– Traditional—habit and custom determine the rules.
– Market—this economy is based on free enterprise, the idea that private individuals or groups have the right to own property or businesses and make a profit with only limited government interference.
– Command—the government controls the economy is this system.