Economic Systems

How Does An Economy Work? Nations must answer 3 basic Economic question: What goods and services should be produced? How should the goods and services be produced? For who should the goods and services be produced? The way a nation answers these questions defines their economy.

Types of Economic Systems All economic systems fall into one of two broad categories: Market (or Capitalist) System Command (or Planned) System No economy can be purely market or purely command Elements of both economies are found in all systems this makes all economies mixed

A Pure Market Economy No government involvement in economic decisions The government lets the people answer the three basic economic questions What? Customers decide through their purchases How? This is left up to the individual business –BUT- a business must be profitable Who? People who have money can buy more – this encourages hard work and investments

A Pure Command Economy The Government controls the factors of production and makes all the decisions The government is responsible for answering the three economic questions What? One person ( a dictator) or a group of government officials (central planning committee) decide what is to be produced How? The government owns all the factors of production and makes all the decisions about production Who? The government decide who receives what is produced in the economy

Mixed Economies Some government involvement through mandatory laws and regulations that businesses follow Labor Laws, Minimum Wage The government provides social programs for those who need help Medicare, welfare All economies are mixed they are classified based on how much the government is involved in the process

Continuum of Economic Systems Market Economy Capitalism On the far right Command Economy Communism On the far left Socialism Left of center but right of communism

Capitalism An economic system characterized by private ownership of businesses and marketplace competition The government is concerned about its people and takes care of those who cannot care for themselves The political system is a democracy with leaders elected by the people The United States and Japan are examples of a Capitalist Economy

Socialism Increased government involvement in people’s lives and the economy The main goal is to keep prices low for all people and to provide employment for many The government runs key industries and makes economic decisions More social services for all and free or low cost medical care Canada, Germany, Sweden, Australia and Great Britain are all examples of socialist economies

Communism The government runs everything (Totalitarian government) Only one political party, the Communist party, runs the government All people able to work are assigned jobs – there is virtually no unemployment The government assigns housing, schools, and occupations There is little to no economic freedom Cuba, North Korea, and China are examples

Economies In Transition The breakup of the Soviet Union is the best example of a country changing from a Command Economy to a Market Economy State owned industries have been privatized (government owned businesses are sold to private citizens) Today even socialist countries are selling some of their government owned businesses to individuals