Economic Systems

Economic Systems Economic System – an organized way of providing for the wants and needs of the people. All societies use an economic system. Three major economic systems exist: Traditional Command Market Most economies combine elements of the three

Traditional Economies Traditional Economies use ritual, habit, or customs to answer the basic questions of WHAT, HOW, and FOR WHOM to produce. Advantages: Everyone knows which role to play. Little uncertainty on what or how to produce. Customs and traditions determine who is provided for. Disadvantages: Individuals generally not free to make decisions. New ideas discouraged, leading to stagnation and lower standard of living. Strict rules defined by elders and ancestors.

Traditional Economies There are a few examples of a Traditional Economy, though most are seen as ‘primitive’ or ‘undeveloped’ The Inuit uses a traditional economy, skills and traditions are passed down from parents to children. The tea plantations of South Asia also run on a traditional economic system.

Command Economies Central authority makes the major decisions in a Command Economy Advantages: Can change direction drastically through emphasizing/allocation. Health and public services available to everyone at little or no cost Disadvantages: Basic wants and needs of consumers are ignored. Economies tend to be unproductive, not producing a good product. Large decision-making bureaucracy lacks flexibility. Severely limits private property rights. Individual freedom and initiative are limited.

Command Economies Examples of Command Economies: Soviet Union Peoples’ Democratic Republic of Korea China & Russia

Market Economies A Market Economy allows people to make decisions in their own best interest. Buyers and sellers exchange goods and services in a market. Market economies are based on capitalism. Capitalism means that the factors of production are privately owned.

Market Economies Advantages: High degree of individual freedom. Adjusts gradually to change over time. Small degree of government interference. Decision making is decentralized. Large variety of goods and services. High degree of consumer satisfaction.

Market Economies Disadvantages: Not everyone is provided for. May not provide enough of some basic goods and services. High degree of uncertainty for workers and employers.

Market Economies Examples of Market Economies: United States England Canada Mexico

Mixed Economies Most economies in the real world are mixed economies. When political systems are considered with economic systems, the picture gets more complicated. The type of political system in a mixed economy is less important than the way basic economic decisions are made.

Mixed Economies Advantages: Disadvantages: Provides assistance for some people who might otherwise be left out In a democratic society, voters use electoral power to affect WHAT, HOW, and FOR WHOM decisions. In a socialist society, FOR WHOM is addressed more directly by the government. Disadvantages: More services mean higher cost for citizens overall. In socialist countries, availability of services may be limited or quality deteriorates over time.