ECONOMIC SYSTEMS

The study of how to distribute limited resources

the study of how people choose to use scarce resources to satisfy their wants.

What is Economics?

Economic System The organization of an economy, which

represents a country’s distinct set of social custom, political institutions, and economic practices

Economic System All societies must deal with the problem

of scarcity. They must make choices about resource allocation because their resources are limited and they must strive to use their resources as efficiently as possible

There are 3 basic economic questions that must be answered by all societies

3 Basic Economic Questions That Any Society Must Answer What to produce How to produce For whom to produce

4 main economic systems Traditional Market Command Mixed

Market economy (capitalism) An economic system based on private

ownership Economic decisions are answered

largely by the market (the buyers and sellers’ decisions in the marketplace)

Individuals are free to pursue their own self-interest

The government seldom intervenes

Market Economy Is consumer-centered and innovative but

creates inequality and instability Profit acts as the incentive for production Consumers help sellers decide what to

produce for those who are willing and able to pay for these products

Resources flow to those industries producing profitable products

Command Economy (socialism/ communism) All productive property, natural

resources and capital are in the hands of the government

Central planners decide on what should be produced, how production should be carried out and how the output should be distributed

Equalizes income but often lacks freedom.

Traditional Economy An economic system in which economic

decisions are made on the basis of custom and tradition

The way outputs are distributed remain the same from generation to generation

Resources are allocated by inheritance Focuses on non-economic concerns and

have tight social constraints.

Traditional Economy The level of technology is low and pace

of life is generally slow Can be found in places in South

America, Africa and rural places in Asia

Mixed Economy It is only in theory that a country is purely

a market or a command economy because each system has serious flaws

Most economies are a mix of market and command systems

Mixed Economy

An economic system that combines aspects of a market economy and a command economy

Production decisions are made both in private markets and by the government

Range of Economic Systems

Index of Economic Freedom www.heritage.org/index

Economic Goals There are seven major economic goals:

economic efficiencyincome equityprice stabilityfull employmentviable balance of paymentseconomic growthenvironmental sustainability

Complementary and Conflicting Economic Goals

Economic goals may be complementary.An example is the relationship between full

employment and economic growth. Economic goals may be conflicting.

An example is the relationship between price stability and economic growth.

Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Economic Goals1. Economic Efficiency

- getting the highest benefit from an economy’s scarce resource

Economic Goals2. Income Equity

- a country’s output is distributed fairly

Economic Goals3. Price Stability

- maintaining a general level of prices for goods

Economic Goals4. Full Employment

- increase employment rate to fully utilize the country’s human resources

Economic Goals5. Viable Balance of Payments

- ensure a balance between exports and imports

Economic Goals6. Economic Growth

- Economic growth will lead to an outward shift in the production possibilities curve, leading to higher standard of living

Economic Goals7. Environmental Sustainability

- the quality of the physical environment should be sustained