The Three Economic QuestionsAnd

The Four Economic Systems

Economic Systems

Every society must answer three economic questions:

•What goods and services should be produced?

•How should these goods and services be produced?

•Who consumes these goods and services?

Four Economic Systems

TraditionalCommandMarketMixed

Traditional Economic System: Ritual, Habit, and Custom

The basic economic questions are answered: by doing things the way they have always been done.

Advantages Sets forth certain economic roles for all

members of the community Stable, predictable, and continuous life Revolves around family Communities stay relatively close and small

Disadvantages Discourages new ideas,

new technology, and new ways of doing things

Stagnation and lack of progress

Lower standard of living – lack modern conveniences

Have few mechanisms in place to deal with disasters such as floods, drought

Command or Centrally Planned Economic System

Basic economic questions of what, how and for whom to produce are

answered: by a central planning authority.

Advantages Central authority is in command of the economy Capable of dramatic change in a short time Little uncertainty over choice of career, where

to work, or losing job Many basic education, public health, and other

public services available at little or no cost

Disadvantages Does not meet wants and needs

of consumers Lacks effective incentives to get

people to work Requires large bureaucracy, which

consumes resources New and different ideas

discouraged, no room for individuality

Problems of a Centrally Planned Economy

Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

Market Economic System: (Free Market, Capitalism)Buyers and Sellers: Dollars “Vote”

The Basic economic questions are answered: by having buyers and sellers make economic decisions.

Advantages Overtime, can adjust to

change Individual freedom for

everyone Little government

interference Decentralized – not

concentrated in the hands of a few

Variety of goods and services High degree of consumer

satisfaction

Disadvantages Rewards only productive

resources; does not provide for people too young, too, old, or too sick to work

Workers/businesses face uncertainty as a result of competition and change: no guarantee for job

Does not produce enough public goods such as defense, universal education, or health care

Mixed Economic SystemThe basic economic questions are answered: by combining traditional, state-run, and private enterprises.

Mixed Economic System: No real disadvantagesA combination a traditional, market, and

command economies.Need government intervention – create

laws protecting property rights and enforcing contracts

Governments provide for national defense, roads and highway systems, conservation, environmental protection, education

Key is to balance control and freedom

The degree of government involvement in the economy varies among nations, and can affect its society.

Continuum of Mixed Economies

Centrally planned Free market

Iran

North Korea

Cuba

China

Russia Greece Peru United States

South Africa France United Kingdom

Botswana Canada Singapore

Hong Kong

Essential Questions/IdeasHow do societies provide the necessary items

for their people?Who gets to decide?Which economic system fails to worry about

its people’s wants?How does each system assign roles to play in

the economy?When should government intervene in the

economy?Which economic system do you think is most

beneficial for everyone? Why?