4 Major Economic Systems NOTES Fill in the missing information on your notes handout. Highlight bolded items.

The Fundamental Economic Questions WHAT should be produced? HOW should it be produced? WHO should get the product?

The Fundamental Economic Questions The way in which a society answers these three economic questions is known as its Economic Systems

4 Major Economic Systems 1. Traditional Economy 2. Free Enterprise system (market) 3. Communism (command) 4. Socialism (command)

TRADITIONAL ECONOMY Definition: An economic system in which the people depend on subsistence agriculture and cottage industries. This type economy is often found in rural, non-industrial areas of the world.

4 Main Features of a Traditional Economy 1. Economic Decisions: Custom and tradition determine what should be produced, how it should be produced, and for whom. 2. Production: The production of goods is based on custom and time-honored methods. New ideas are discouraged. Change and growth proceed very slowly. 3. Private Property: Often there is no private property---things are owned by the family or village in common 4. Trade: Goods and services are produced to meet the needs of the members of the family or tribe. Since they are produced and consumed locally, there is very little trade with outsiders.

Subsistence Agriculture The farmer and family grow just enough to use for the family or village. There is rarely a surplus of items produced, so rarely is it sold or traded. The people are involved with feeding themselves from their own land and livestock.

Cottage Industries The people use their spare time in their homes to weave cloth, make furniture & clothes, & to produce other goods by hand. Cottage industries help farmers and their families meet their needs. Most cottage industries involve the entire family working together.

Advantages of a Traditional Economy Everyone knows their role Little uncertainty over what to produce or how to produce The question of “for whom” to produce is answered by custom Life is generally stable, predictable, and continuous

Disadvantages of a Traditional Economy Tends to discourage new ideas Lack of progress leads to lower standard of living

Examples of Countries with a Traditional Economy: South Africa (the bushmen of the Kalahari Desert) Algeria (the Berber tribesmen) South Asian countries

FREE ENTERPRISE SYSTEM Definition: An economic system in which people freely produce and buy what they want. The basis of a Market Economy

The U. S. has an economy called the Free Enterprise System http://www.socialstudieshelp.com/Images/EcoPillars.jpg

Four Main Features of a Free Enterprise System 1. Private property: People have a right to own private property (personal possessions, factories, farms, businesses) and to use this property as they see fit with limited government interference. 2. Free enterprise: People are free to take part in any business, buy any product, or sell any legal product. Businesses are also free to do anything they wish in order to attract customers --- (competition is good) i.e. lower prices, provide better quality goods, advertise, etc.

Four Main Features of a Free Enterprise System 3. Profit Motive: The ability to make profits is what drives people to risk their money in starting a new business. 4. Supply and Demand: The interaction of supply and demand determines prices in a free enterprise economy. When demand is high, the price goes up. If the supply is high but the demand is low, the price goes down.

There are four main decisions that are essential in a FREE ENTERPRISE SYSTEM. What to produce? ??? How much to produce? Where to locate your business? What prices to charge for goods and services?

Important concepts to know about the Free Enterprise System Prices are set by the interaction of supply and demand. Low demand/large supply results in lower prices. High demand/short supply results in higher prices. It is motivated by profit. Producers invest their money in order to make a PROFIT! There is little government interference. Scarcity of a resource can cause the producers to pay a higher price to import that resource.

More details about the Free Enterprise System Items are produced that CONSUMERS want to buy. The PRODUCER or seller looks at what consumers want and produces it for sale. If poor quality items are produced, it could cause that company or manufacturer to go out of business. Competition of price is important.

Strengths of the Free Enterprise System Freedom exists for everyone involved Very little government interference Variety of goods and services are produced High degree of consumer satisfaction

Weaknesses of the Free Enterprise System Difficult to decide for whom to produce Difficult for the old, sick, and young to be involved in the production Markets fail resulting in recessions and depressions Monopolies may develop due to lack of competition Transportation of resources slows down production The producers have the advantage over the consumers because they may know more information

Examples of countries: United States Chile Great Britain France Canada Japan Germany Singapore

COMMUNISM Definition: An economic system in which all important economic decisions are made by government leaders. Leaders decide what, how, and for whom goods and services will be produced. Corruption is widespread in Communist countries.

4 Main Features of Communism 1. Role of Government: All major decisions on production, distribution and the use of resources are made by government planners. 2. Private Property: Private property ownership is abolished and replaced by national ownership of land, factories, farms, and major resources. 3. Cooperation: Communism is based on cooperation, in which all workers should labor together and share equally. The economy is supposed to be run for the benefit of all members. In practice, government leaders run things to prepare for true communism. 4. Major Goal: The goal is to achieve a classless society (no higher class, middle class, or lower class) ---equality among all workers!

Strengths of Communism Economy Can change direction drastically in a short period of time Benefits the government

Weaknesses of Communism economy Not designed to meet the wants and needs of the people Lack of incentives to work hard leads to unexpected results Major government involvement in economic planning Not flexible in dealing with day to day problems New and unique ideas are often stifled or discouraged

Examples of Countries: China North Korea Vietnam Cuba Former Communist countries: Soviet Union (USSR), Poland, Hungary, Yugoslavia, Czechoslovakia, Eastern European nations, etc.

SOCIALISM Definition: An economic system in which the most important businesses producing goods (mines, factories, businesses) are owned by the government rather than by individuals. The government often owns the nation’s railroads, airlines, hospitals, banks, utility companies, mining or oil companies, etc. Socialism does encourage private ownership of small businesses.

4 Main Features of Socialism 1. Role of Government: Government should use its power to bring an end to poverty by taking control of the major resources of the nation and by providing public services. 2. Economic Decisions: Many decisions about production, distribution, and the use of resources are made by the government. Other decisions are made privately. 3. Private Property: Major industries are owned by the government. Other property is held privately. 4. Major Goal: Socialism seeks a fair distribution of income among all members of society. People’s basic needs (health care, transportation, education, housing) are met for free or at a very low cost.

Strengths of a Socialism economy Free public services available for the people Government works to have little or no poverty Encourages small businesses

Weaknesses of a Socialism economy Government involvement in large businesses Lack of competition in large businesses leads to set prices for consumers Resources are controlled by the government

Examples of Countries: Sweden Israel Former Socialist countries included India and Ghana (Africa)

Think About It! How would scarcity affect a Free Enterprise System, Traditional economy, Communism, and/or Socialism? Which type of economy would survive BEST in a world-wide famine or other disaster?