How do economic systems answer the basic economic questions

1. Economic Economic
SystemsSystems
UNIT THREE NOTESUNIT THREE NOTES

2. Economic SystemsEconomic Systems
An An economic system economic system describes how a describes how a
country’s economy is organizedcountry’s economy is organized
Because of the problem of Because of the problem of scarcityscarcity, every , every
country needs a system to determine how to country needs a system to determine how to
use its productive resourcesuse its productive resources
An economic system must answer 3 An economic system must answer 3
basic questions…basic questions…

3. Economic SystemsEconomic Systems
WHAT TO PRODUCE? WHAT TO PRODUCE? (What kinds of goods and (What kinds of goods and
services should be produced?)services should be produced?)
HOW TO PRODUCE? HOW TO PRODUCE? (What productive resources (What productive resources
are used to produce goods and services?)are used to produce goods and services?)
FOR WHOM TO PRODUCE? FOR WHOM TO PRODUCE? (Who gets to have the (Who gets to have the
goods and services?goods and services?
The way a society answers these questions The way a society answers these questions
determines its economic system.determines its economic system.

4. Four Types of Four Types of
Economic Systems:Economic Systems:
1. Traditional Economy1. Traditional Economy
2. Command Economy2. Command Economy
3. Market Economy3. Market Economy
4. Mixed Economy (Market + Command)4. Mixed Economy (Market + Command)

5. Traditional EconomyTraditional Economy
An economic system in which economic An economic system in which economic
decisions are based on customs and decisions are based on customs and
beliefsbeliefs
People will make what they always made People will make what they always made
& will do the same work their parents did& will do the same work their parents did
Exchange of goods is done through Exchange of goods is done through
BarteringBartering: trading without using money: trading without using money

6. 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 Who are the goods & services
produced for?produced for?
People in the village who need themPeople in the village who need them

7. Traditional Economy Traditional Economy
Examples:Examples:
Villages in Africa and South America; the Villages in Africa and South America; the
Inuit tribes in Canada; the caste system in Inuit tribes in Canada; the caste system in
parts of rural Indiaparts of rural India

8. Command SystemCommand System
Government makes all economic decisions & Government makes all economic decisions &
owns most of the propertyowns most of the property
Governmental planning groups determine Governmental planning groups determine
such things as the prices of goods/services & such things as the prices of goods/services &
the wages of workersthe wages of workers
This system has not been very successful & This system has not been very successful &
more and more countries are abandoning itmore and more countries are abandoning it

9. 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 goods Who 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

10. Command SystemCommand System
Countries with communist governments have Countries with communist governments have
Command economiesCommand economies
Examples: Cuba, former Soviet Union, North Examples: Cuba, former Soviet Union, North
KoreaKorea
*Germany and Russia have moved away from *Germany and Russia have moved away from
having a Command economy since 1991. Now having a Command economy since 1991. Now
they have a Mixed economy.they have a Mixed economy.

11. 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 Most of the resources are owned by
private citizensprivate citizens
Economic decisions are based on Economic decisions are based on Free Free
EnterpriseEnterprise (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 individuals
Gov. does not tell a business what goods to Gov. does not tell a business what goods to
produce or what price to chargeproduce or what price to charge

12. 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 Who decides how to produce goods
and services?and 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

13. Market EconomyMarket Economy
There are no truly pure Market There are no truly pure Market
economies, but the United States is economies, but the United States is
close.close.

14. 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 economies exhibit characteristics of both
systems and are often referred to as systems 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 Businesses own most resources and
determine what and how to produce, but the determine what and how to produce, but the
Government regulates certain industriesGovernment regulates certain industries

15. Mixed EconomyMixed Economy
Who decides what to produce?Who decides what to produce?
businessesbusinesses
Who decides how to produce goods and Who decides how to produce goods and
services?services?
Businesses, but the government regulates Businesses, but the government regulates
certain industriescertain industries
Who are the goods and services Who are the goods and services
produced for?produced for?
consumersconsumers

16. Mixed EconomyMixed Economy
Most democratic countries fall in this Most democratic countries fall in this
category (there are no truly pure Market category (there are no truly pure Market
or Command economies).or Command economies).
Examples: Brazil, Mexico, Canada, UK, Examples: Brazil, Mexico, Canada, UK,
etc.etc.

17. Which Economic System Which Economic System
Is Best?Is Best?
Market system has proven to be best Market system has proven to be best
because it promotes the goals of growth, because it promotes the goals of growth,
freedom, & efficiencyfreedom, & efficiency
Citizens are free to own their own property Citizens are free to own their own property
and use it in the most efficient and profitable and use it in the most efficient and profitable
wayway
Command and Traditional systems Command and Traditional systems
sometimes offer more security, but are sometimes offer more security, but are
not nearly as strong in efficiency, growth, not nearly as strong in efficiency, growth,
freedom, and environmental qualityfreedom, and environmental quality