Economic Systems

Economies Based on Tradition Characteristics Traditional Economy – Use of scarce resources, and almost all other economic activity, is based on ritual, habit, and custom. Habit & custom also dictate social behavior Roles defined by customs of elders & ancestors, not individual choice

Advantages Everyone knows what role to play Little uncertainty… Over WHAT to produce Over HOW to produce Over FOR WHOM to produce Economies Based on Tradition

Disadvantages Discourages new ideas & ways of doing things Punishes people who act different Lack of progress results in economic stagnation & lower standard of living Economies Based on Tradition

Economies Based on Command Command Economy – Central authority makes major decisions about WHAT, HOW, & FOR WHOM to produce. Potential Leaders – King, Dictator, President, Tribal Leader, etc. Socialism – Economic & political system in which the government owns some, but not all, factors of production. Government decides WHAT, HOW, & FOR WHOM.

Characteristics Central governing authority makes all major economic decisions Severely limited private property Socialist economies very similar, fewer government owned resources Objective of Socialist government – Serve needs of people BOTH – Decisions made for the people, NOT by the people Economies Based on Command

Advantages Can change direction drastically Allows citizens to receive goods & services they couldn’t normally afford Economies Based on Command

Disadvantages Leaders provide for themselves at expense of people No individual freedom to choose Radio & TV limited to government approved propaganda Lack of quality goods Lots of bureaucracy No individual incentives Lack of flexibility Small economies Economies Based on Command

Economies Based on Markets Market Economy – Economic system in which supply, demand, & price help people make decisions & allocate resources. People make decisions based on own best interest

Characteristics Lots of freedom Buyers help producers decide WHAT to produce Businesses decide HOW to produce FOR WHOM decided by income and spending Private ownership of resources Economies Based on Markets

Advantages High degree of individual freedom Adjusts gradually to change over time Relatively small degree of government interference Decision-making decentralized Large variety of goods & services High degree of consumer satisfaction Goods privately owned Economies Based on Markets

Disadvantages Does not provide for everyone May not provide enough of some basic goods & services High degree of uncertainty Economies Based on Markets