ECONOMIC SYSTEMS

3 main economic systems Traditional Market Command

Traditional Economy

Advantages Offer the advantages of stability Emphasize the spiritual and cultural aspects

of life

Disadvantages Often have widespread poverty Social restrictions restrain human potential People must follow the dictates of custom

rather than having the freedom to make their own economic choices

Command EconomyAdvantages Income Distribution

There is more of an attempt to distribute income more equally because a country operating under the command economy can choose to distribute income among its citizens on the basis of considerations other than purely economic ones

Economic GrowthCentral planners can focus on promoting the rate of

economic growth by devoting more resources to developing certain types of goods (e.g. Stalin focused on developing capital goods to industrialize Russia)

Command EconomyDisadvantages Planning Difficulties

Incorrect estimates of future conditions are all too easy to make, leading to overproduction of some items and underproduction of others

InefficienciesThe incentive to earn more profit for one self is take away,

thus waste and an inefficient use of resources resultCorruption of government official is also a frequent problemPlanners often focuses on meeting quotas, thus often

emphasizes on quantity over quality of goods Lack of Freedom

Individual economic and political freedom are inhibited

Market EconomyAdvantages Consumer Sovereignty

Decisions of what to produce is ultimately guided by the needs and wants of consumers

PricesCo-ordinates the activities of buyers and sellers to stop

either too much or too little of an item from being produced Innovation

Incentive to make a profit encourages innovation and entrepreneurship, which help foster advances in technology

New and better products are introduced in the market as a result

Market EconomyDisadvantages Income Distribution

The distribution of income can create significant inequities if households’ incomes are based solely on the ability to supply economic resources

Market ProblemsPrivate markets do not always operate in a way that

benefits society as a whole, thus leading to problems such as pollution

InstabilityCan display considerable instability in the total output

produced from year to year, resulting in variations in prices or employment level