Economic Systems Ms. Anderson Fall 2002

3 Basic Questions n Because of scarcity societies must answer three basic economic questions: u 1. What shall we produce? u 2. How will we produce it? u 3. For whom shall we produce it?

Economic Systems n The way these three questions are answered determines the type of economic system a society has. n Three major types of economic systems exist: F Traditional F Command F Market

Traditional Economy n Economic activity follows ritual, habit or custom. n The three questions are answered as they have always been. n Stable, predictable and continuous. n Tends to discourage new ways of doing things.

Command Economy n A central authority answers the three basic questions. n Economy can change direction quickly. n May not meet the needs of consumers; few incentives to work hard.

Market Economy n People and firms answer the three basic economic questions. n People’s decisions act as votes. n Individual freedom for everyone; large variety of goods and services. n Some people unable to participate.

Key Elements of a Market Economy n Freely determined prices: individuals and firms interact to determine prices. n Property Rights: individuals have the legal authority to keep or sell property, whether land or resources. Provides incentives. n Freedom to trade: at home or abroad. n A (limited) role for government. n Private organizations: economic interactions occur in firms, families, and charitable organizations.

Mixed Economy n Today, most economies are “mixed.” That is, they are primarily one type of system, but also contain elements of the other two. n What elements of the traditional system can you find in the US economy? n What elements of command are in our economy?

Name the System n We give gifts on birthdays. n We have to pay taxes. n Dimond’s school store sells coffee. n Certain classes are required for graduation. n We tip waiters. n Most nurses are women. n Music stores sell the most popular music.