Economic Systems

How Does An Economy Work?

Nations must answer 3 basic Economic question: What goods and services should be

produced? How should the goods and services

be produced? For who should the goods and

services be produced? The way a nation answers these

questions defines their economy.

Types of Economic Systems

All economic systems fall into one of two broad categories: Market (or Capitalist) System Command (or Planned) System

No economy can be purely market or purely command

Elements of both economies are found in all systems this makes all economies mixed

A Pure Market Economy No government involvement in economic

decisions The government lets the people answer the

three basic economic questions What? Customers decide through their

purchases How? This is left up to the individual

business –BUT- a business must be profitable

Who? People who have money can buy more – this encourages hard work and investments

A Pure Command Economy

The Government controls the factors of production and makes all the decisions The government is responsible for answering the

three economic questions What? One person ( a dictator) or a group of

government officials (central planning committee) decide what is to be produced

How? The government owns all the factors of production and makes all the decisions about production

Who? The government decide who receives what is produced in the economy

Mixed Economies Some government involvement

through mandatory laws and regulations that businesses follow Labor Laws, Minimum Wage

The government provides social programs for those who need help Medicare, welfare

All economies are mixed they are classified based on how much the government is involved in the process

Continuum of Economic Systems

Command Economy

Communism

On the far left

Market Economy

CapitalismOn the far

right

SocialismLeft of center but right of communism

Capitalism An economic system characterized by

private ownership of businesses and marketplace competition

You get what you earn/ You reap what you sew

The political system is a democracy with leaders are elected by the people

A system where you are not penalized for making a maximum profit

Socialism a completely classless society, where the

government controls all means of production and distribution of goods. 

Socialists believe this control is necessary to eliminate competition among the people and put everyone on a level playing field

The idea is that if everyone works, everyone will reap the same benefits and prosper equally.

In socialism, the government want to redistribute the wealth by taking from those that have earned more money that others and giving it to those that have earned less

Communism The government runs everything

(Totalitarian government) Only one political party, the Communist

party, runs the government All people able to work are assigned jobs

– there is virtually no unemployment The government assigns housing,

schools, and occupations There is little to no economic freedom Cuba, North Korea, and China are

examples

Economies In Transition The breakup of the Soviet Union is the

best example of a country changing from a Command Economy to a Market Economy

State owned industries have been privatized (government owned businesses are sold to private citizens)

Today even socialist countries are selling some of their government owned businesses to individuals

United States of America Mixed Economy Increased Social Programs Government Getting more involved

in the market (bailing out big industries)

Increased taxes Controlling retirement? How this affects you