Economic Systems

Economic Systems

Definition: The method a society uses to produce and distribute goods and services. Every society must answer three

questions:

1. What goods and services should be produced?

2. How should these goods and services be produced?

3. Who consumes these goods and services?

(how will they be distributed?)

Traditional Economy

Based on customs/beliefs handed down by generation

Advantages:1. Expectations are clear2. Strong family and community bonds

Disadvantages:3. Progress comes slowly4. Inefficient methods of production

Examples: Amish society Inuit peoples of the Arctic region Aborigines of Australia’s outback

Command Economy Government controls factors of production &

makes decisions regarding the 3 basic q’s Decisions might come from single person or

a groupAdvantages:1. Resources can be re-allocated (re-routed)

quickly2. Very low unemployment

Disadvantages:3. Little or no incentive for workers4. Goods are often poor quality5. Lack of choices for consumers

Examples6. Former Soviet Union7. North Korea8. Cuba

Market Economy

Aka “capitalist economy” or “capitalist system”

Individuals can own or control: Land, labor, capital (the factors of

production) Individuals are motivated by self-

interest Decisions are guided by prices

Market Economy, cont.

Advantages:1. Freedom of choice2. Wide variety goods/services3. Rewards those who are motivated4. Innovations, rapid progress, higher

std. living

Disadvantages: 5. Members of society who cannot

compete are often excluded from enjoying benefits of the system

Mixed Economy

Basically, a market economy BUT with limited government intervention (i.e., gov’t DOES impose some limits)

The American economy is mixedExamples of gov’t intervention in the U.S.

economy:1. Social security system2. Minimum wage law3. Anti-Monopoly laws

* Nearly all world economies today are mixed…some with MORE gov’t. control than others

Review of Yesterday

1. What is the economic system that is based on custom and beliefs?

2. What is the economic system where gov’t has control over everything?

3. What kind of economic system do we have in the United States?

4. Why is competition good for consumers?

Review of Yesterday

4. Why is competition in a mixed/market economy better for the consumer than the government control inherent in a Command economy (name two)?

5. What is the most common outcome of the quality of products in a Command Economy?