The Three Economic Questions And The Four Economic Systems

Every society must answer three economic questions: What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Four Economic Systems Traditional Command Market Mixed

Traditional Economic System: Ritual, Habit, and Custom The basic economic questions are answered: by doing things the way they have always been done.

Advantages Sets forth certain economic roles for all members of the community Stable, predictable, and continuous life Revolves around family Communities stay relatively close and small

Disadvantages Discourages new ideas, new technology, and new ways of doing things Stagnation and lack of progress Lower standard of living – lack modern conveniences Have few mechanisms in place to deal with disasters such as floods, drought

Command or Centrally Planned Economic System Basic economic questions of what, how and for whom to produce are answered: by a central planning authority.

Advantages Central authority is in command of the economy Capable of dramatic change in a short time Little uncertainty over choice of career, where to work, or losing job Many basic education, public health, and other public services available at little or no cost

Disadvantages Does not meet wants and needs of consumers Lacks effective incentives to get people to work Requires large bureaucracy, which consumes resources New and different ideas discouraged, no room for individuality

Problems of a Centrally Planned Economy Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

Market Economic System: (Free Market, Capitalism) Buyers and Sellers: Dollars “Vote” The Basic economic questions are answered: by having buyers and sellers make economic decisions.

Advantages Overtime, can adjust to change Individual freedom for everyone Little government interference Decentralized – not concentrated in the hands of a few Variety of goods and services High degree of consumer satisfaction

Disadvantages Rewards only productive resources; does not provide for people too young, too, old, or too sick to work Workers/businesses face uncertainty as a result of competition and change: no guarantee for job Does not produce enough public goods such as defense, universal education, or health care

Mixed Economic System The basic economic questions are answered: by combining traditional, state-run, and private enterprises.

Mixed Economic System: No real disadvantages A combination a traditional, market, and command economies. Need government intervention – create laws protecting property rights and enforcing contracts Governments provide for national defense, roads and highway systems, conservation, environmental protection, education Key is to balance control and freedom

The degree of government involvement in the economy varies among nations, and can affect its society. Continuum of Mixed Economies Centrally planned Free market Iran North Korea Cuba China Russia Greece Peru United States South Africa France United Kingdom Botswana Canada Singapore Hong Kong

Essential Questions/Ideas How do societies provide the necessary items for their people? Who gets to decide? Which economic system fails to worry about its people’s wants? How does each system assign roles to play in the economy? When should government intervene in the economy? Which economic system do you think is most beneficial for everyone? Why?