Economic Systems Who get to decide what gets produced? How it gets produced? And who gets to have it?

Economic Realities Wants > resources = scarcity Consequences of scarcity –people must make choices –goods and services must be rationed

All nations must answer 3 basic economic questions: 1.What goods and services should be produced and in what quantity? 1.What goods and services should be produced and in what quantity? 2. How should these products be produced? 2. How should these products be produced? 3. For whom should these products be produced? 3. For whom should these products be produced? EOC study guide Basic Economic Concepts #4

1.What goods and services should be produced? Should a local government use resources to build a new school, repair an old highway, or construct a new recreation center? Should American producers use resources to make goods for national defense or to provide services for retired people who are too old or ill to work? Should a farmer grow wheat, cotton, or lettuce?

2. How should these products be produced? How should we obtain crude oil to meet our energy needs? How much pollution should we allow firms to generate when producing goods? How should hogs be raised before they become food?

3. For whom should these products be produced? Who should receive the limited supply of flu vaccinations? Who should benefit from the construction of a new school? Who should a shoe manufacturer market their products toward?

An economic system is a particular set of social institutions which deals with the production, distribution, and consumption of goods and services in a particular society

3 Types of Economic Systems Traditional economy An economic system that relies on custom or tradition to answer the 3 basic questions EOC study guide Basic Economic Concepts #5

Traditional Economies Economic activity written by past generations –Produce goods that satisfy basic survival needs produce little surplus engage in minimal trade –Use primitive capital goods--no technology and entrepreneurship –Rigid division of labor uses gender, age, and skills to define status and role in society EOC study guide Basic Economic Concepts #5

Amish of Pennsylvania Past generations determined: –the main crops are hay, wheat, barley, rye and corn –crops are harvested using horse-drawn plows –society will voluntarily redistribute wealth to members who are needy

Mbuti population of northern Zaire pygmy hunter- gatherers live in bands, ranging from 15 to 60 people. Mbuti population totals about 30,000 to 40,000 people

Kavango tribes of Namibia Kavangos make their living from fishing, cattle, and the farming of sorghum, millet and maize The chief has power over his entire tribe and is responsible for the allocation of land. Although the Kavango chiefs are always male, the system is mostly matrilineal

Types of Economic Systems Cont. Command economy Traditional economy An economic system in which the government dictates the answers to the basic economic questions An economic system that relies on custom or tradition to answer the 3 basic questions EOC study guide Basic Economic Concepts #6

Command Economies The government or other central authority makes all economic decisions Individuals have little, if any, influence over economic functions Resources are owned by the government There is no competition; the purpose of business is to provide goods and services, not to make a profit Factories are concerned with quotas Consumers have few, if any, choices in the market place The government sets the prices of goods and services EOC study guide Basic Economic Concepts #6

Old Kingdom in Egypt (2660 BC-2180 BC) Pharaoh undisputed central authority Pharaoh owned all land and collected taxes from peasants who farmed it Peasants required to work on public projects –Canals –Temples –Pyramids –Serve in the army

Soviet Union 1920s-1990s Communist Party dictated the use of society’s resources –Central planning authority sets production levels for almost all products –May redistribute income, usually from society’s high earners to its low earners –Government controls prices

North Korea One of the world's last centrally planned systems –market allocation is sharply limited – mainly in the rural sector where some peasants sell produce from small private plots. –almost no small businesses.

Types of Economic Systems Cont. Command economy Traditional economy Market economy An economic system in which the government dictates the answers to the basic economic questions A type of economy that relies on the individuals and businesses to answer the 3 basic questions and manage the factors of production An economic system that relies on custom or tradition to answer the 3 basic questions EOC study guide Basic Economic Concepts #7

Market Economies Economic decisions are made by individuals competing to earn profits based on supply and demand Resources are owned by individuals Profit, not quotas, is the motive for increasing work Competition determines price and increases the quality of products Individual freedom is considered very important; individuals have freedom to make economic decisions Also called “capitalist” economy EOC study guide Basic Economic Concepts #7

Hong Kong A free port that attracted foreign trade and investment Offers free markets and profit incentives with few government regulations on business activities Hong Kong enjoys the most economic freedom of any economy in the world

Mixed Economies Combines elements of pure market and command economies – Government and individuals share the economic decision making process Government guides and regulates production of goods and services Resources are owned by individuals Government serves to protect both producers and consumers from unfair policies and practices

Mixed Economies Index based on Economic Freedom

Three Basic Economics Questions: What to produce? How to produce? For whom to produce?