Economic Systems

Economic System The way in which a country handles its economic decisions and solves economic problems How countries make earning and spending decisions Each country must establish

Four Basic Elements Resources (Factors of Production) Markets Natural resources (Land) Human resources (Labor) Capital goods (Capital) Entrepreneurship Markets Buying and selling goods and services Market = both buyers and sellers

Four Basic Elements Participants Medium of exchange Producers, consumers, government Producers create goods/services Consumers purchase for use Government makes/enforces laws for system Medium of exchange To obtain good/service Most common is money Without it, people would have to barter (trade)

Need for Economic Systems No country has enough resources to supply everything Choices must be made No way to balance supply and demand Avoid shortages of some goods and surpluses of others People are interdependent Depend on each other to get what they need

Types of Economic Systems Economic systems are divided, but none are a pure system Contains elements from other systems Traditional Command Communist Socialist Market

Traditional Economic Systems Traditions from generations Habits, customs, and beliefs Very few new ideas or improvements Subsistence level Barely supports life Consume all they produce Examples: Asia, Africa, Latin America

Command Economic Systems Government owns and operates many or all means of production and distribution Key role in planning and decision-making Consumer decision making limited Two types: Communism Socialism

Communism Means of production and distribution are owned and controlled by the government Economic planning, decisions, and control of the system Sets prices, establishes quotas, tell workers where they will work, provides capital for business investment Example: China

Socialism Government owns part of the means of production and determines how products will be distributed Private ownership exists Pay scales set by government Welfare states Free medical care, education, welfare, etc. High taxes Example: Great Britain

Market Economic Systems Individuals and businesses own or control the means of production and distribution Government control of business is limited Workers are motivated to work for profit Allocation of resources is controlled by market Activity moves in a continuous circle Example: United States, Japan

Basic Economic Questions What will be produced? Must be answered first Depends on: profit, wants/needs, resources How will products be produced? Methods of production, resources, technology, etc. How will products be allocated? Seldom possible for everyone to have equal share

Problems With Traditional Economies No growth or progress Produce only what they need, never save Vicious cycle Low incomes, low savings, low capital, low productivity

Problems with Communist Command Economies Delayed economic development because individuals cannot invest No competition Inefficient use of resources Government controls what will be produced and wages paid

Problems with Socialist Command Economies High taxes for individuals and high cost of production High priced products, reduces national income Privately owned businesses abide by state’s master plan Government encourages and discourages types of work Workers paid according to value of work in eyes of government

Problems with Market Economies Financial loss, government will not assist Competition is source of some problems Some products not produced because producers not ensured profit Heavy influence on some items to produce Incomes are not equal Resources in short supply

How do the different economies answer the three basic economic questions? Traditional Economies Communist Command Economies Socialist Command Economies Market Economies