Economic Systems

Why do we have Economic Systems?

• Survival for any society depends on its ability to provide food, clothing, and shelter for its people.

• The Economic System is the organized way a society provides for the wants and needs of its people.

Economic Systems•An economic system describes how a country’s economy is organized

•Because of the problem of scarcity, every country needs a system to determine how to use its productive resources

•Scarcity =

•a permanent lack of resources

•not having enough of something

•An economic system must answer 3 questions…

Key Economic Questions

1.WHAT TO PRODUCE?What kinds of goods and services should be produced?

2.HOW TO PRODUCE?What productive resources are used to produce goods and

services?

3.FOR WHOM TO PRODUCE?Who gets to consume the goods and services?

Economic Systems

• Traditional Economy• Command Economy• Market Economy• Mixed Economies

• Most are mixed

Traditional Economy

• Economic activity is based on ritual, habit and custom

Traditional Economy

•Examples:•Villages in Africa and South America •the Inuit tribes in Canada•the caste system in parts of rural India•the Aborigines in Australia

Traditional Economy

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

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

• Exchange of goods is done through Bartering: trading without using money

Traditional Economy

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

•Who decides how to produce goods & services?

•People grow & make things the same way that their ancestors did

•Who are the goods & services produced for?

•People in the village who need them

Strengths of Traditional Economies

• Everyone knows their role

• Little uncertainty over what to produce or how to produce

• The question of For Whom to produce is answered by custom

• Life is generally stable, predictable, and continuous

Weaknesses of Traditional Economies

• Tends to discourage new ideas

• Lack of progress leads to lower standard of living

Economic PhilosophersMarxist /

Communist

Karl Marx Freidrich Engles Vladimir Leninfounded the

Soviet Union

Command Economy

• Central authority makes most economic decisions

• Economic decisions are made at the top and the people are expected to go along with choices their leaders make

Command Economy

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

•Government planning groups determine such things as the prices of goods/services & the wages of workers

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

Strengths of Command Economies

• Change direction drastically in a relatively short time

(The USSR went from an agrarian to industrial nation

in a very short time)

Command Economy

•Who decides what to produce?•Government makes all economic decisions

•Who decides how to produce goods and services?

•Government decides how to make goods/services

•Who are the goods and services produced for?

•Whoever the government decides to give them to

Command Economic System

•Countries with communist governments have had Command economies

•Examples: There are no truly pure command economic systems, but close countries are: North Korea and Cuba

*China and Russia have moved away from having command economies since 1991. Now they have mixed economies, but still government planning and intervention.

Weaknesses of Command Economy

• Not designed to meet the wants and needs of individuals

• Lack of incentives to work hard leads to unexpected results

• Large bureaucracy for economic planning

• Not flexible in dealing with minor day to day problems

• People with new or unique ideas are stifled

Kim Jong-Il of North Korea (below)Died in December 2011.

Succeeded by his son, Kim Jong-Un

A propaganda poster of the Soviet Union

Economic PhilosophersFree Market

Adam Smithwrote

The Wealth of NationsAdd name here Add name here

Market Economy

Markets allow buyers and sellers to come together in order to exchange goods and services

People and firms act in their own best interest to answer economic questions.

Market Economy• An economic system in which production and

distribution questions are answered by prices and profits (supply and demand)

• Most of the resources are owned by private citizens

• Economic decisions are based on Free Enterprise

• Competition between companies

• Important economic questions are not answered by government but by individuals

• Government does not tell a business what goods to produce or what price to charge

Market Economy

There are no truly pure Market economies, but the United States is close.

Market Economy•Who decides what to produce?

•Businesses base decisions on supply and demand and free enterprise (PRICE)

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

•For whom are the goods and services produced?•Consumers

•In a truly free market economy, the government would not be involved at all

•There would be no laws to protect workers form unfair bosses•There would be no rules to make sure that credit cards were properly protected

•Many societies have chosen to have some rules to protect consumers, workers, and businesses (MIXED)

•These rules reduce the freedoms that businesses have, but they also protect the workers and consumers

Weaknesses• The primary weakness is deciding for whom to

produce• The young, sick and old would have difficulty in a pure market environment

• Markets sometimes fail• Competition

• monopolies may develop

• Resource mobility• resources are sometimes hindered from moving about

• Availability of information• producers often have more information than do consumers,

which gives them advantage

Mixed Economy• Market + Command = Mixed

• There are no pure command or market economies. • To some degree, all modern economies exhibit

characteristics of both systems and are often referred to as mixed economies.

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

• Businesses own most resources and determine what and how to produce, but governments regulates certain industries

Mixed Economy

•Who decides what to produce?•businesses

•Who decides how to produce goods and services?

•Businesses, but the government regulates certain industries

•Who are the goods and services produced for?

•consumers

Mixed Economies•Most democratic countries fall in this category

•there are no truly pure Market or Command economies•Examples: Brazil, Mexico, Canada, UK, US, Germany, Russia, Australia, etc.

Economy Continuum

Command Market

Cuba

Russia GermanyUS

AustraliaUKNorth Korea

China Hong Kong,Singapore

Which Economic System is Best?

•The Market system has proven to be best at promoting the goals of growth, freedom, & efficiency

•Citizens are free to own their own property and use it in the most efficient and profitable way

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