Types of Economic Systems

How do nations decide what type of economic system to have? Scarcity results from the combination of limited resources and unlimited wants. So scarcity forces us to make choices among ways to spend our time and money (both of which are resources). Nations also must make choices in order to use factors of production efficiently. Leaders of a nation must address three basic economic questions: what, how, and for whom to produce.

What types of Economic systems are there? There are 3 basic economic models. All economies are actually a combination of these models. Traditional Economy Command Economy Market Economy

Traditional Economies What to Produce Determined by tradition Economic roles often passed from generation to generation How to Produce Determined by custom For Whom to Produce Centered around traditional family and social units: tribe Aborigines of Australia

Command Economies What to Produce Determined by government officials How to Produce Determined by government officials For Whom to Produce Determined by government officials Zhou Dynasty, China

Market Economies What to Produce Determined by individuals How to Produce Determined by individuals For Whom to Produce Determined by individuals United States of America

Self-Interest “Invisible Hand” theory (A rising tide lifts all ships!) Individuals pursue their own self interest Self-Interest = $, support family Each economic actor positively affects each other economic actor Adam Smith Wealth of Nations No government involvement! (Laissaiz Faire)

Authoritarian Socialism Mixed Economies: All are now mixed! Pure Command Model Pure Market Model Capitalism Democratic Socialism Authoritarian Socialism Highly decentralized Closest to pure market model Lots of private ownership of factors of production Some factors of production owned and controlled by government Example: health care, education, energy resources Highly centralized Closest to pure command model All factors of production owned and controlled by government