Economic Systems Chapter 2

Economic Systems ► An economic system is an organized way of providing for the wants and needs of the society’s people. ► It is how societies choose to answer our three basic questions. (What, How, and For Whom?)

Traditional Economies ► In traditional economies, the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom. ► Usually, habit and customs dictate most social behavior, and individuals are not free to make decisions on what they want or would like to have.

Traditional Economies ► Advantages --Everyone knows their role—WHAT questions answered for them --Everyone knows HOW to produce (same as their parents did before them) --FOR WHOM questions answered by customs and traditions

Traditional Economies ► Disadvantages: --Discourages new ideas (and therefore new economic growth) --Lack of progress leads to lower standard of living

Command Economies ► A command economy is one in which a central authority makes most of the WHAT, HOW, and FOR WHOM decisions. ► Economic decisions are made by the government: the people have little, if any, influence over how the basic economic questions are answered.

Command Economies ► Advantages: --Can change direction in a relatively short period of time --There is little uncertainty about one’s role in the society --Government provides social reforms/programs for little to no cost to the public

Command Economies ► Disadvantages: --Not designed to meet the wants of consumers --No Flexibility --Little to no individual incentives

Market Economies ► In a market economy people and firms act in their own best interest to answer the WHAT, HOW, and FOR WHOM questions. ► A market is any mechanism that allows buyers and sellers to find each other and trade their goods and services. ► People’s decisions influence the WHAT, HOW, and FOR WHOM.

Market Economies ► Advantages: --Can adjust to change over time --High degree of individual freedom --Relatively small degree of government interference --Decision making is decentralized (not given to the central government) --Variety of goods and services available to consumers --High degree of customer satisfaction and standard of living

Market Economies ► Disadvantages: --Doesn’t provide basic needs for everyone in the society (poor, elderly, sick) --Doesn’t provide public services (system of justice, national defense, health care) --High degree of uncertainty --Must be reasonably competitive, resources must be reasonably free to move from one activity to another, and consumers need access to adequate info to make wise decisions or economy can fail very easily

Mixed Economy ► An economy in which there are some elements of a traditional economy, some elements of a command economy, and some elements of a market economy ► What the U.S. is said to have