Economic Systems

Economic Systems An economic system describes how a country organizes its economy. Because of the problem of scarcity, every country needs a system to determine how to use its productive resources Scarcity = limited resources An economic system must answer three basic questions

Basic Economic Questions WHAT TO PRODUCE? (What kinds of goods and services should be produced?) HOW TO PRODUCE? (What productive resources are used to produce goods and services?) FOR WHOM TO PRODUCE? (Who gets to have the goods and services? How are the goods/services delivered?)

Types of Economic Systems 1. Traditional Economy 2. Command Economy 3. Market Economy * Most countries are a combination of economic systems…Mixed Economies!

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 often done through bartering: trading without using money

How to produce goods & services? What to produce? People decide and follow their customs and make what their ancestors made How to produce goods & services? People grow & make things the same way that their ancestors did For whom are the goods & services produced? People in the village who need them

Government makes all economic decisions and owns most of the productive resources or property Governmental planning groups determine such things as the prices of goods/services & the wages of workers This system has historic roots in countries with communist or centralized authoritarian governments

How to produce goods and services? What to produce? Government makes all economic decisions based on the needs of the country’s economy (not consumer need) How to produce goods and services? Government decides how to make goods and services – and owns the factories and means of production For whom are the goods/services produced? Government decides – prices are regulated but the choice of goods/services available to the consumer is limited

Countries with communist governments have Command economies There are no pure command economic systems, but countries North Korea and Cuba are close *China and Russia had strong command economies but have moved away from this system somewhat and now they have more of a Mixed Economy.

An economic system in which basic economic questions are answered by exchanges in the marketplace [producers and consumers] – not the government Most productive resources are owned by private citizens Economic decisions are based on Free Enterprise (competition between companies) This system is sometimes called capitalism

How to produce goods and services? What to produce? Decisions based on supply and consumer demand The government does not tell a business what goods or services to produce/offer or what prices to charge How to produce goods and services? Businesses decide how to produce goods/services efficiently and for a profit For whom are the goods/services produced? consumers

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

In a truly free market economy, the government would not be involved at all There would be no laws to protect workers from unfair bosses or no minimum wage There would be no rules to make sure that consumer rights were properly protected There would be no government owned businesses (like the US Postal Service) Many societies have chosen to have some rules to protect consumers, workers, and businesses These rules reduce the freedoms that businesses have, but they also protect the workers and consumers and create a Mixed Market Economy

Who decides what to produce? businesses Who decides how to produce goods and services? Businesses, however, the government creates some regulations and laws particularly for worker safety, wages, and rights For whom are the goods and services produced? 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 Market Command UK US Cuba China Russia Australia