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“Introduction to Economic Systems”
Critical Questions
• What key economic questions must every society answer?
• What basic economic goals do societies have?
• What types of economic systems exist today?
What is an economic system?
The method used by a
society to produce and
distribute goods and
services
The Three Questions that Determine
the Economic System within a
Country or Society. – What goods and services should be
produced?
– How should these goods and services be produced?
– Who consumes these goods and services?
• Every society has some system or mechanism
that transforms that society’s scarce resources
into useful goods and services.
An economic system is the method used by a society
to produce and distribute goods and services.
Three Economic Systems
Traditional economies rely
on habit, custom, or ritual to
decide what to produce,
how to produce it, and to
whom to distribute it.
In a command economy
the central government
makes all decisions about
the production and
consumption of goods and
services.
In a market economy
economic decisions are
made by individuals and
are based on exchange, or
trade.
Mixed economies are
systems that combine
command, traditional,
and the free market with limited
government intervention.
Comparing Economic Systems
Economic System
• Traditional
• Market
• Command
Who answers the 3 ?’s
• Customs
• Individuals
• Central Government
Individuals with some
government involvement Mixed
Traditional System
• A traditional system relies on habit,
custom or ritual to decide what to
produce, how to produce it and to
who to distribute it.
• Agricultural and hunting societies
• There is little room for innovation or
change.
• They tend to lack modern conveniences
and have a low standard of living.
• Close knit communities with focus on the
family unit.
Traditional Economy • Found in rural, under-
developed countries–
– Aboriginals
– Eskimos or Inuit
– Inca
• Customs govern the
economic decisions that
are made
• Farming, hunting and
gathering are done the
same way as the
generation before
• Economic activities are
centered around the family
or ethnic unit
• Men and women are given
different economic roles
and tasks
• Advantages: people have
specific roles; security in
the way things are done
• Disadvantages: Technology
is not used; difficult to
improve
Markets exist because none of us produces
all the goods and services we require to
satisfy our needs and wants.
A market is an
arrangement that
allows buyers and
sellers to
exchange goods
and services.
Specialization is the
concentration on
one or two products
that guarantee profit
and minimum effort
in regards to
competition.
Why Do Markets Exist?
Free Markets
monetary flow
physical flow
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households Firms
• In a free market
economy, households
and business firms use
markets to exchange
money and
products.
• Households
own the factors
of production
and consume goods and
services.
Advantages of the
Market Economic Efficiency
• As a self-regulating
system, a free
market economy is
efficient.
Economic Growth
• Because
competition
encourages
innovation, free
markets encourage
growth.
Economic Freedom
• Free market economies
have the highest degree of
economic freedom of any
economic system.
Additional Goals
• Free markets offer a
wider variety of goods
and services than any
other economic system.
Market Economy (Free Enterprise)
• Also called a Free Market
Economy or Free Enterprise
Economy
• Businesses and consumers
decide what they will
produce and purchase and in
what quantities
• Decisions are made
according to law of supply
& demand
• Supply and demand of
goods and services
determine what is produced
and the price that will be
charged.
• Advantage—competition to
have the best products and
services
• Disadvantage—huge rift
between wealthy and poor
• Note: a true market
economy does not exist.
Command Economies
The government or
central authority
controls the
economy.
In a command economy, the government
owns both land and capital. The government
decides what to produce, how much to produce,
and how much to charge.
Socialism philosophy
based on the belief
that democratic means
that the wealth should
be distributed evenly
throughout a society.
Communism is a political
system where all economic
and political power rests in
the hands of the government.
Socialism led to Communism
under Vladimir Lenin in the
former Soviet Union.
Organization of Command Economies
Command Economy • The government (or central
authority) determines what, how, and for whom goods and services are produced.
• Two types: – Strong Command – where
government makes all decisions (communism – North Korea)
– Moderate Command – where some form of private enterprise exists but the state owns major resources (China, Vietnam, and Cuba)
• Advantages – Guarantees equal standard
of living for everyone
– Less crime and poverty
– Needs are provided for through the government
• Disadvantages – Minimal choices
– Fewer choices of items
– No incentive to produce better product or engage in entrepreneurship
The Soviet Experiment • Land, labor and capital was all controlled by
the state. The best resources were allocated to to the armed forces, space program, and production of capital goods.
• Government committees decided the quantity, process and distribution of all products.
• The government created large state-owned farms and collectives to produce all agricultural products.
• Under this system there was little incentive to produce, and the Soviet Union saw a rapid decline in the production of agricultural goods.
The Meaning Behind the Flag The hammer and sickle originate
from the unique Russian unity of the peasants (the sickle) with the workers (the hammer) who together formed the Soviet Russian state.
• The Red field is symbolism of the blood that has been spilt by workers the world over in the fight for their emancipation.
• The single yellow star is the representation of the life and immense energy of the sun, empty because within is the blood or production of workers struggle.
Command economy face
problems of poor-quality
goods, shortages, and
diminishing production.
Other Problems in Centrally Planned Economies
• Performance falls short of the set ideals
• Fail to meet consumer needs and wants
• Little individual incentives to work hard
• Lack of improvement
• Expensive and inflexible government
structure needed to manage the system
• Sacrifice of individual freedoms to
pursue societal goals
Mixed Economies
• It is doubtable that any nation can exist successfully under a pure command economy or a pure market economy.
•However, most economies mix features of both systems.
Mixed Economy • Combination of a
market and a
command economy
• Government takes
the people’s needs
into consideration
• The Marketplace
takes care of
people’s wants.
• Most nations have a mixed economy: United States, United Kingdom, Australia
• Advantage —balance of needs and wants met by government and in marketplace
• Disadvantage —citizens have to pay taxes
Continuum of Mixed Economies
Centrally planned Free market
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Iran
North Korea Cuba China
Russia
Greece Peru United States
South Africa
France
United Kingdom
Botswana Canada Singapore
Hong Kong
An economic system that permits the conduct of business with minimal
government intervention is called free enterprise. The degree of government involvement in the economy varies among nations.
Nations are placed on a continuum (a range) of mixed economies. On one end are centrally planned or command economies and on the
opposite end are free or markets economies.
Comparing Mixed Economies
Sudan
Syria
Economic Systems
Pure
Market
Pure
Command
Pure Command (Command Market) is when the government controls
what is produced, how it is produced, how much is produced,
and what to charge for the produced item.
Economic Systems
Pure
Market
Pure
Command
Pure Market (Market Economy) is when the people control
what is produced, how it is produced, how much is produced,
and what to charge for the produced item.
Economic Systems
Pure
Market
Pure
Command
Mixed Economy is a blending of Command and Market Economies
Economic Systems
Pure
Market
Pure
Command
Where a country is on this continuum determines it’s economic success…
Too much towards the Command side is too restrictive and disallows
economic growth; too much towards the Market side is not restrictive
and allows more opportunity for things to go wrong.
Pure
Market
Pure
Command
North
Korea
2%
India
54%
Japan
73%
China
53%
USA
78%
South Africa
64%
Cuba
27% Iran
45%
Saudi Arabia
60%
Israel
68%
Nigeria
55%
Soviets
0%
USA 1920s
100%
•Tariffs…
•Embargoes…
•Scarcity…
•Quotas…
•Taxes on imported and exported
goods which increases profits.
•Some countries have agreements
which reduce or eliminate tariffs;
such as, NAFTA and the European
Union.
•Trade restrictions placed on a
country that limits the amount of
goods they receive from other
nations. •Cuba, Iran, and Iraq are examples
of nations in which other nations
trade very little with or not at all.
•When an item, such as oil, is in
limited supply.
•This causes an increase in price for
the buyer and increases the profits
for the seller. However, scarcity also
causes nations to look for other
sources…
•A limit on the amount of goods one
nation can send to another nation in
a given period of time.
•For example, Japan can only import
1, 000, 000 cars every six months
into the USA. This prevents too many
Japanese being on the market and
protects prices…
•Also known as Free Market or Free
Enterprise.
• Individuals drive the economy for the
most part and they can open up their
own businesses and make profit.
•Entrepreneurs flourish and a division
between the rich and the poor develops.
•Also known for having a Command
Market.
•The government drives the economy
for the most part.
•The government shares the wealth with
all people.
•Also known for having a Command
Market.
•The government drives the economy
for the most part.
•The government keeps the wealth.
•Growing only enough food to feed your
family. You meet your subsistence needs.
•Growing enough food to meet your
subsistence needs, and growing
food to sell for profit.
•Organization of the Petroleum exporting
countries. There are 13 members.
•They control the supply of oil which
impacts the prices and demand.
•Shared or community farms in Israel.
•They work together to run the farms
and they share the profits.
•Government owned farms in China.
•They work together to run the farms
and they get a small percentage of the
profits to share.
•North American Free Trade Agreement.
•Canada, USA, and Mexico do not charge
each other tariffs. This is suppose to
allows for Mexico to gain more wealth.
•Large commercial farms in Mexico.
•Use to be government owned but many
are now individually owned.
•Industry in Northern Mexico that imports
parts from another country and then puts
the parts together.
Examples: cars, furniture, toys
•This allows Mexico to sell the whole
product for a fraction of the cost.
•A confederation of European nations
that work together to insure fair trade
with no tariffs.
•They also work together to improve
and protect the environment.
•Also created a common currency.
•The currency of most European nations.
•Nine nations including the United
Kingdom are members of the Union
but have chosen to keep their own
currency.
•GDP (Gross Domestic Product) is the
total value of a country.
•If we could sell all of the products, all
imports and exports, and all technology;
we would have the total wealth of a nation.
•A high GDP equals a high literacy rate, a
skilled workforce, technology, abundant
natural resources, and favorable government
policies.
