Economic SystemsEconomic Systems

http://www.slideshare.net/ansley22/economic-systems-notes-ab (adapted)

Economic SystemsEconomic Systems How a country’s economy is organizedHow a country’s economy is organized

Because of the problem of Because of the problem of scarcityscarcity, , every country needs a system to every country needs a system to determine how to use its productive determine how to use its productive resourcesresources

An economic system must answer 3 An economic system must answer 3 basic questions…basic questions…

WHAT TO PRODUCE? WHAT TO PRODUCE? (What kinds of goods (What kinds of goods and services should be produced?)and services should be produced?)

HOW TO PRODUCE? HOW TO PRODUCE? (What productive (What productive resources are used to produce goods and resources are used to produce goods and services?)services?)

FOR WHOM TO PRODUCE? FOR WHOM TO PRODUCE? (Who gets to (Who gets to have the goods and services?have the goods and services?

The way a society answers The way a society answers these questions determines its these questions determines its economic system.economic system.

4Types of Economic Systems:4Types of Economic Systems:

1. Traditional Economy1. Traditional Economy 2. Command Economy2. Command Economy 3. Market Economy3. Market Economy 4. Mixed Economy (Market + Command4. Mixed Economy (Market + Command))

Traditional EconomyTraditional Economy

An economic system in which economic An economic system in which economic decisions are based on customs and beliefsdecisions are based on customs and beliefs

People will make what they always made & People will make what they always made & will do the same work their parents didwill do the same work their parents did

Exchange of goods is done through Exchange of goods is done through bartering: trading without using moneybartering: trading without using money

Traditional EconomyTraditional Economy

Who decides what to produce?Who decides what to produce? People follow their customs and make what People follow their customs and make what

their ancestors madetheir ancestors made Who decides how to produce goods & Who decides how to produce goods &

services?services? People grow & make things the same way People grow & make things the same way

that their ancestors didthat their ancestors did Who are the goods & services produced Who are the goods & services produced

for?for? People in the village who need themPeople in the village who need them

Traditional Economy Traditional Economy

Examples:Examples: Villages in Africa and South America; Villages in Africa and South America;

the Inuit tribes in Canada; the caste the Inuit tribes in Canada; the caste system in parts of rural Indiasystem in parts of rural India

Command SystemCommand System

Government makes all economic Government makes all economic decisions & owns most of the propertydecisions & owns most of the property

Governmental planning groups Governmental planning groups determine such things as the prices of determine such things as the prices of goods/services & the wages of goods/services & the wages of workersworkers

This system has not been very This system has not been very successful & more and more countries successful & more and more countries are abandoning itare abandoning it

Command EconomyCommand Economy Who decides what to produce?Who decides what to produce?

Government makes all economic decisionsGovernment makes all economic decisions Who decides how to produce goodsWho decides how to produce goods

and services?and services? Government decides how to make Government decides how to make

goods/servicesgoods/services Who are the goods and services Who are the goods and services

produced for?produced for? Whoever the government decides to give Whoever the government decides to give

them tothem to

Command Command SystemSystem

Countries with communist governments Countries with communist governments have Command economieshave Command economies

Examples: Cuba, former Soviet Union, Examples: Cuba, former Soviet Union, North KoreaNorth Korea

*Germany and Russia have moved away *Germany and Russia have moved away from having a Command economy since from having a Command economy since 1991. Now they have a Mixed economy.1991. Now they have a Mixed economy.

Market EconomyMarket Economy An economic system in which economic An economic system in which economic

decisions are guided by the changes in decisions are guided by the changes in prices that occur as individual buyers and prices that occur as individual buyers and sellers interact in the market placesellers interact in the market place

Most of the resources are owned by private Most of the resources are owned by private citizenscitizens

Economic decisions are based on Economic decisions are based on Free Free Enterprise Enterprise (competition between (competition between companies)companies)Important economic questions are not Important economic questions are not answered by gov. but by individualsanswered by gov. but by individualsGov. does not tell a business what goods Gov. does not tell a business what goods to produce or what price to chargeto produce or what price to charge

Market EconomyMarket Economy

Who decides what to produce?Who decides what to produce?Businesses base decisions on supply and Businesses base decisions on supply and demand and free enterprise (PRICE)demand and free enterprise (PRICE)

Who decides how to produce goods and Who decides how to produce goods and services?services?Businesses decide how to produce goodsBusinesses decide how to produce goods

Who are the goods and services Who are the goods and services produced for?produced for?ConsumersConsumers

Market EconomyMarket Economy

There are no truly pure Market There are no truly pure Market economies, but the U.S. is close.economies, but the U.S. is close.

Mixed EconomyMixed Economy

Market + Command = MixedMarket + Command = Mixed There are no pure command or market There are no pure command or market

economies. To some degree, all modern economies. To some degree, all modern economies exhibit characteristics of both systems economies exhibit characteristics of both systems and are often referred to as and are often referred to as mixedmixed economies. economies.

Most economies are closer to one type of Most economies are closer to one type of economic system. than anothereconomic system. than another

Businesses own most resources and determine Businesses own most resources and determine what and how to produce, but the Government what and how to produce, but the Government regulates certain industriesregulates certain industries

Mixed EconomyMixed Economy

Who decides what to produce?Who decides what to produce?BusinessesBusinesses

Who decides how to produce goods & Who decides how to produce goods & services?services?

Businesses, but the government Businesses, but the government regulates certain industriesregulates certain industries

Who are goods & services produced for?Who are goods & services produced for?

ConsumersConsumers

Mixed EconomyMixed Economy

Most democratic countries fall into this Most democratic countries fall into this category (there are no truly pure Market or category (there are no truly pure Market or Command economies).Command economies).

Examples: Brazil, Mexico, Canada, UK, Examples: Brazil, Mexico, Canada, UK, etc.etc.

Which Economic System Is Which Economic System Is Best?Best?

Market system - proven to be the best. It Market system - proven to be the best. It promotes the goals of growth, freedom, & promotes the goals of growth, freedom, & efficiencyefficiency

Citizens are free to own their own Citizens are free to own their own property & use it more efficiently & property & use it more efficiently & profitablyprofitably

Command & Traditional systems sometimes Command & Traditional systems sometimes offer more security, but are not as strong in offer more security, but are not as strong in efficiency, growth, freedom, and efficiency, growth, freedom, and environmental qualityenvironmental quality