Economic Systems How do different societies around the world meet their economic needs? What are the advantages and disadvantages of each economic system?

What is Economics? Economics: the study of how individuals, businesses, and nations make things, buy things, spend money and save money. Economists: people who study economics

The Problem of Scarcity The problem of scarcity is the basic problem of economics. Something is scarce when we do not have enough of it. People have unlimited wants. A society can produce only a limited number of things at any one time.

What are goods and services? Things that people make Things that people do for others

The Fundamental Economic Question The problem of scarcity forces every society to answer three fundamental economic questions: What should be produced? How should it be produced? Who should get it?

Types of Economic Systems The way a society answer the three economic questions is known as its economic system. Traditional Free Enterprise Communist Socialist

Traditional Economy The three questions are answered according to tradition. Main Features: Economic decisions are determined by tradition. Production is based on custom. New ideas are discouraged. Change is very slow. Private property does not exists. All property is owned by the family or the tribe. There is very little trade outside the tribe or family.

Production Methods of Traditional Economies Subsistence Agriculture: the land only produces enough crops to feed the farmer and his family. Everything grown is intended for use by the family or tribe Cottage Industries: people use their spare time in their home to weave cloth, make furniture and clothes, and to produce other goods by hand. Helps farmers and families to meet their needs and may give them some extra income.

Traditional Economy

Free Enterprise System Also known as capitalism or the free market system People invest their money in different thing so that they may gain a profit. People are free to produce whatever they wish and to buy whatever they can afford.

How prices are determined in the Free Enterprise System The Interaction of Supply and Demand Prices High Demand / Short Supply Prices Low Demand / Large Supply

The Role of Government in Free Enterprise System Limited government interference Acts as an umpire Maintains a monetary system Provides the nation’s defense Protect people’s rights to own property Main Features of the Free Enterprise System People have the right to private property People are free to take part in any business, buy any product, or sell any legal product. People are motivated by profit to take risks. The interaction of supply and demand determines prices

Production Methods (Free Enterprise) Commercial Agriculture: Farmers grow food in order to sell it to others for cash. Commercial Industries: goods are manufactured in factories for sale throughout the country or overseas.

Free Enterprise System

Communism Developed in the 1800’s by Karl Marx Believed that capitalists took advantage of workers by taking away most of the value they produced. In theory, there are no social classes. Cooperation replaces competition, and everyone’s needs are met. In practice, all important economic decisions are made by government leaders.

Main Features of Communism Government makes all major decisions on production, distribution, and use of resources Private property ownership is abolished and replaced by national ownership of all land, factories, farms, and major resources Communism is based on cooperation, all workers should labor together and share equally Major goal is to achieve a classless society. Equality among all.

Communism

Socialism Very similar to communism Most important businesses producing goods are owned by the government rather than by individuals. Government typically own their nation’s railroads, airlines, hospitals, banks, utility companies, mining or oil companies Unlike communism, socialism encourages private ownership for small businesses Shops, small manufacturers

Main Features of Socialism Government should use its power to bring an end to poverty by taking control of major resources and providing public services Many decisions about production, distribution and resources are made by the government. Major industries owned by the government, other property held privately Major goal is to seek fairer distribution of income among all members of society. Health care, transportation, education, housing are provided for free or at low cost by the government.

Mixed Economies In the real world, no economy totally follows any one economic system. Blend features of each.

Complete this chart on your left side! Economic System What to Produce? How is it Produced? Who gets it? Traditional Set by tradition and custom Free Enterprise To producers decide how to produce Communist Determined by government planners Socialist