A Brief Overview of Economic Systems

Economic Systems Traditional Economy Command Economy Market Economy ( also Mixed Economy)

1. What goods and services will be produced? People in all economies must answer three basic questions: 1. What goods and services will be produced? No society can produce everything its people want. Why? Should US Steel produce more car parts? Plane parts? Beams for buildings? Rails for roads? What do consumers need more of – Books? Video games? Diapers? 2. How will these goods and services be produced? Through the combination of land, labor, capital but how?? Small businesses? Mass production? By hand? Should we use land for farms or factories? Should more people be taught to be lawyers or firemen? 3. Who will consume them? Who gets what? Who deserves what? Fairness/equity? Ability to pay? First come, first served? According to need?

People in all economies must answer three basic questions: National economies vary in the extent to which they rely on government directives (central planning) and signals from private markets to allocate scarce goods, services, and productive resources.

Traditional Economies People often perform the same type of work as their grandparents and parents regardless of their abilities or their potential

In Traditional Economies, economic decisions are based on customs and history

The goal of a traditional economy is stability and security.

Farming, hunting and gathering are done the same way as the generations before with little technological advancements.

Goods and services are distributed through a hierarchical system - the tribe, family, or other social structure.

People know their role in life, but there are little opportunities to change.

Command Economy In a Command Economy, the government or other central authority makes decisions and determines how resources will be used.

Less selection on the store shelves There is no competition between businesses because the government sets the prices of goods and services. Businesses are not run to create a profit and shortages are common. The consumer has limited choices in the market place Less selection on the store shelves Bread line

The government dictates the job in which you work. Command Economy The government dictates the job in which you work.

The goal of Command economies is equity and security… …goods and services are distributed more evenly and everyone gets at least some healthcare, housing and food

(Free) Market Economy

In a free market economy there is little or no government involvement In a free market economy there is little or no government involvement. Profit and consumer sovereignty are the motive for economic decisions.  Competition creates great individual choice and lots of options for goods and services. .

The main goals of a market economy are economic freedom, efficiency, and profit. If an entrepreneur can find someone willing to buy it, they will sell it. Yes, squeeze bacon

“Consumer sovereignty” means the consumer decides what will sell on the market …or what won’t sell!

There is mostly private ownership of property and producers choose the most profitable method of production There is competition among businesses which helps determine price and increases the quality of the products.

Goods and services are consumed by those who are willing and able to pay the market price.

There is lots of individual choice and freedom with opportunities to be successful.

But… buyer beware! (caveat emptor) In a pure free market economy there is little consumer protection !

Mixed Economies In Mixed Economies government and individuals share in the ownership of resources and the decision making process.

Individuals and businesses own the means of production and private property. Government is owner and decision maker for the public sector. (roads, courts, schools…) Individuals and businesses are owners and decision makers for the private sector. (houses, shops, factories…)

The main goals of a mixed economy ar much like a market economy - economic stability, economic freedom – but the government is also involved to provide public goods and for consumer protection

While the government makes decisions for the public sector

Businesses have the freedom to get creative with their building designs

In Mixed Economies individuals and businesses make decisions for the private sector…

Most economies today (including the U.S.) are mixed economies