The Three Economic Questions And The Four Economic Systems

Economics Definition: The social science that deals with the production, distribution, and consumption of goods and services.

Every society must answer three economic questions: What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Four Economic Systems Traditional Command Market Mixed

Traditional Economic System Ritual Habit Custom The basic economic questions are answered by doing things the way they have always been done.

Traditional A system in which the production is the result of ritual, habit, and custom (It is generational). Examples – Half of the African nations and other tribal states tend to have traditional economies.

Advantages Sets forth certain economic roles for all members of the community Stable, predictable, and continuous life Revolves around family Communities stay relatively close and small

Disadvantages Discourages new ideas, new technology, and new ways of doing things Stagnation and lack of progress Lower standard of living – lack modern conveniences Have few mechanisms in place to deal with disasters such as floods, drought

Command Economic System or Centrally Planned Government Or Central Authority Committee Basic economic questions of what, how and for whom to produce are answered by a central planning authority.

Command Economy An economic system in which the production is controlled by the state. Examples – Cuba, North Korea, China, and Iran

Advantages Central authority is in command of the economy Capable of dramatic change in a short time Little uncertainty over choice of career, where to work, or losing job Many basic education, public health, and other public services available at little or no cost

Disadvantages Does not meet wants and needs of consumers Lacks effective incentives to get people to work Requires large bureaucracy, which consumes resources New and different ideas discouraged, no room for individuality

Problems of a Command (Centrally Planned) Economy Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

Market Economic System (Free Market, Capitalism) Buyers and Sellers Dollars “Vote” Basic economic questions answered by having buyers and sellers make economic decisions.

Market Economy A system in which the production is owned and operated for profit. Example – The people are running the businesses.

Advantages Overtime, can adjust to change Individual freedom for everyone Little government interference Decentralized – not concentrated in the hands of a few Variety of goods and services High degree of consumer satisfaction

Disadvantages Rewards only productive resources; does not provide for people too young, too, old, or too sick to work Workers and businesses face uncertainty as a result of competition and change – no guarantee for job Does not produce enough public goods such as defense, universal education, or health care

Mixed Economic System A combination of both state-run and private enterprises.

Mixed Economy A system in which the production is a combination of both private and state run businesses. Most economies in the world are mixed economies Example – The United States is considered to have a mixed economy

Mixed Economic System A combination a traditional, market, and command economies. Need government intervention – create laws protecting property rights and enforcing contracts Governments provide for national defense, roads and highway systems, conservation, environmental protection, education Key is to balance control and freedom

The degree of government involvement in the economy varies among nations. Continuum of Mixed Economies Centrally planned Free market Iran North Korea Cuba China Russia Greece Peru United States South Africa France United Kingdom Botswana Canada Singapore Hong Kong

Cave-o-nomics (6:46 min)

Developed v. Developing Gross Domestic Product (GDP) The amount of goods and services produced by a state in one year. A key indicator of the level of development of a state. Per Capita GDP Total GDP number divided by the population to deliver a per person share of GDP. Social, demographic, and economic indicators distinguish less developed countries from developed countries. What are some specific differences between developed and developing countries?

Characteristics of Developed Countries Good natural resources Energy High literacy rates High GDP Stable government Strong economy Good medical care Long life expectancy Examples – United States, United Kingdom, Germany, Japan

Characteristics of Developing Countries Low GDP High poverty rate Low literacy rate Low life expectancy Unstable economy Unstable government Weak industrial base Examples – Haiti, Kenya, Rwanda, Vietnam

Developed Countries Vs. Developing Countries (4:07)

Additional Vocabulary Embargo: Suspension of trade with another country. Gross Domestic Product: GDP is the total economic production of a State in a given year. GDP is also an indicator of the level of economic development of a State. Per Capita GDP: The amount of production in a state in a given year divided by its population Boom/Bust Cycle: Up and down cycle of a market economy characterized by alternating periods of economic growth and contraction. Recession: Short term negative GDP growth in a State’s economy A decrease in GDP over 6 months. Depression: Long term, persistent negative GDP in a State’s economy An economic depression is a really long and persistent recession.

More Information Most countries in the world are considered DEVELOPING. Why? Africa’s economy depends on its abundant mineral resources. The Middle East’s economy depends on oil/petroleum. Many nation’s economies depend on world demand for their goods to succeed. Latin American countries have a hard time attracting investments from world groups due to political instability. Literacy Rate is most often based on the percent of the population over the age of 15 that can read and write

Government Regulators in Action!

Government Regulators in Action! Describe a free-market economy. Why can government regulations be bad? What is good about government regulations? What does it mean to monopolize? What type of economic system is completely controlled by government regulation?