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Economic Systems

Compare different types of economic systems: traditional, free enterprise, command and mixed.

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What is Economics?

  • Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources.

Oil & fuel

Land

Doctors

Technology

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Factors of Production

  • Economic Resources
    • Natural Resources – raw materials found in nature that are used to produce goods
    • Human Resources – people’s knowledge, efforts, and skills used in their work
    • Capital Resources – used to produce goods and services (buildings, materials, and equipment)
    • Entrepreneurial Resources - recognize the need for new goods or service
  • Scarcity – shortage of resources

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Why Economic Systems?

  • Nations use economic systems to determine how to use their limited resources effectively.
  • Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life.
  • Different types of Economic Systems
      • Traditional Economy
      • Market Economy (free enterprise)
      • Command Economy
      • Mixed Economy

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Traditional Economy

  • Found in rural, under-developed countries–
    • Vanuatu
    • Pygmies of Congo
    • Eskimos & Indian tribes
    • Belarus
  • 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

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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

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  • 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.

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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 – China, Cuba)
    • Moderate Command – where some form of private enterprise exists but the state owns major resources (socialism – France and Sweden)
  • 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

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  • Also known as a Planned or Managed Economy

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Mixed Economy

  • Combination of a market and a command economy
  • Government takes care of people’s needs
  • Marketplace takes care of people’s wants.
  • Most nations have a mixed economy: United States, England, Australia
  • Advantage—balance of needs and wants met by government and in marketplace
  • Disadvantage—citizens have to pay taxes