Economic Systems Traditional, Command, Market, and Mixed

There are four types of Economic systems Traditional: based on custom and tradition. Contemporary (present) economic activities are based on the collection of rituals, beliefs, habits and laws developed by the societies ancestors.

Why are there Economic Systems? Scarcity requires all societies to respond to the issue of how they will handle it. Which economic system a society employs depends on that society’s goals and values.

Traditional Economy cont’ Children carry out the economic roles played by their parents. (These often can be based on your gender) Ex., mother passes down her skills as a seamstress, father hands down skills as a plumber.

Traditional Cont’ Custom determines how good will be produced.. Example, bakers carry on traditions in how they cook certain pastries or breads

Traditional cont For whom the goods are produced is based on the traditional family or social units such as a tribe. The goods and services that are produced are distributed amongst the groups members.

Traditional Cont’ By sharing products members of the traditional economy work to maintain the entire group rather than just themselves.

What are the benefits of living in a Traditional Economy? Notebook quick write:

Command Economy Relies on government officials to answer the three basic economic questions. The officials (sometimes referred to as central planners) decide what products, how many products, and who will receive the products The government owns the factors of production.

Command Economy cont’ Because the central planners make the decisions, the rest of the citizenry have little or no choice in their economy. The government maintains complete control over the economy.

What good comes from living in a command economy? Quick Write: Using the available brain power sitting next to you, answer this question:

Market Economy In a PURE Market economy, individuals answer the three basic economic questions. The government gives no input into what, how and for whom goods are produced. The factors of production are owned by the public.

Market Economy People can buy, sell or exchange anything they want. The Marketplace provides the only form of control over what goods and services are sold.

Market Economy------Self Interest How does the market interact with the economy? Adam Smith, pictured here, was the first to write that if the government would leave the market alone, it would regulate itself based on self interest. Self interest in this case would be based on the needs and wants of the citizens.

Self interest is actually a good thing for an economy. Quick Write: How can self interest actually help an economy?

The Invisible Hand Theory When individuals work to meet their own needs and wants, their self interest leads them to do what is best for society. (the invisible hand is referring to someone guiding someone else without the second person realizing they are being guided.

Example of Invisible Hand You get a job as a newspaper delivery person for the money you will gain through your wages. The people whom you deliver to gain by the knowledge acquired when they read the newspaper you delivered. WAGES Services Knowledgeable citizens

Smith believed that Government regulations would conflict with the ability of the invisible hand Government tells you that you have to raise minimum wages This cost affects your business profits, and therefore you are less able to buy new technology.

Market Economy----Incentives An incentive is something that makes you behave in a particular way. Example: Mrs. Neumann offers hot cocoa and doughnuts to her economics class for a B+ average on the next text. (Students want doughnuts and therefore study hard for exam)

Mixed Economies This economy combines elements of the traditional, command, and market economies. Authoritarian Socialism Since almost all economies operate under this type of system, economists have broken it down into three types: Authoritarian Socialism, Capitalism, and Democratic Socialism

Authoritarian Socialism These are economies that are closest to the pure command model. This is also called Communism The government owns nearly all major factors of production. Karl Marx

Capitalism Individuals own factors of production and determine the three basic economic questions. Example: your choice in which career path to follow. Government does have some limited regulations on business. Example students may work no more than 20 hours a week.

Capitalism----Government’s role Government regulates economy through taxation and spending policies, which enable the government to provide services to the people such as education, welfare, and national defense.

Capitalism cont’ The government may also regulate health and safety standards in the workplace. (remember how bad it was during the United States Industrial Revolution for workers?) Private ownership and free choice are the central basis of capitalism. Capitalism is often referred to as a system of “free enterprise”, meaning the citizens are free to conduct business with little intervention.

Democratic Socialism Falls between Authoritarian Socialism and Capitalism Government owns some of the factors of production. Industries such as electricity production, telephone networks are examples of industries the government might own. Individuals influence the economic planning by the election of government officials.