Economic Systems

Economic Systems Definition: The method a society uses to produce and distribute goods and services. Every society must answer three questions: 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services? (how will they be distributed?)

Traditional Economy Based on customs/beliefs handed down by generation Advantages: Expectations are clear Strong family and community bonds Disadvantages: Progress comes slowly Inefficient methods of production Examples: Amish society Inuit peoples of the Arctic region Aborigines of Australia’s outback

Command Economy Government controls factors of production & makes decisions regarding the 3 basic q’s Decisions might come from single person or a group Advantages: Resources can be re-allocated (re-routed) quickly Very low unemployment Disadvantages: Little or no incentive for workers Goods are often poor quality Lack of choices for consumers Examples Former Soviet Union North Korea Cuba

Market Economy Aka “capitalist economy” or “capitalist system” Individuals can own or control: Land, labor, capital (the factors of production) Individuals are motivated by self-interest Decisions are guided by prices

Market Economy, cont. Advantages: Freedom of choice Wide variety goods/services Rewards those who are motivated Innovations, rapid progress, higher std. living Disadvantages: Members of society who cannot compete are often excluded from enjoying benefits of the system

Mixed Economy Basically, a market economy BUT with limited government intervention (i.e., gov’t DOES impose some limits) The American economy is mixed Examples of gov’t intervention in the U.S. economy: Social security system Minimum wage law Anti-Monopoly laws * Nearly all world economies today are mixed…some with MORE gov’t. control than others

Review of Yesterday What is the economic system that is based on custom and beliefs? What is the economic system where gov’t has control over everything? What kind of economic system do we have in the United States? Why is competition good for consumers?

Review of Yesterday Why is competition in a mixed/market economy better for the consumer than the government control inherent in a Command economy (name two)? What is the most common outcome of the quality of products in a Command Economy?