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Economic Systems Compare different types of economic systems: traditional, free enterprise, command and mixed.
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3 questions What to produce How to produce it Whom to produce it for
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5 Economic Goals Economic efficiency Economic freedom Economic growth & innovation Economic security Economic equity Market economy addresses first 3 goals
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Mixed Economy Government intervention helps meet the economic goals of Security-safety against layoffs, protection against injury-OSHA-, natural disasters Equity-monopolies, property rights, patents, copyrights
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Why Economic Systems? Nations use economic systems to determine how to use their limited resources effectively. Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life.
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Different types of Economic Systems Traditional Economy Market Economy (free enterprise) Command Economy Mixed Economy
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Traditional Economy Found in rural, under-developed countries– Eskimos & Indian tribes Customs govern the economic decisions that are made Farming, hunting and gathering are done the same way as the generation before Little innovation or change Advantages: people have specific roles; security in the way things are done Disadvantages: Technology is not used; difficult to improve
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Market Economy (Free Enterprise) Also called Free Market or Free Enterprise Economy Businesses and consumers decide what they will produce and purchase and in what quantities Decisions are made according to law of supply & demand Supply and demand of goods and services determine what is produced and the price that will be charged. Advantage—competition to have the best products and services Disadvantage—huge rift between wealthy and poor Note: a true market economy does not exist.
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Market Economy Function because of self-interest (personal gain) Consumers want to pay the lowest possible price Competition keeps the prices low Self interest and competition regulate the marketplace (invisible hand)
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Market Economy Factor Market-land, labor & capital Households supply land, labor & capital Firms pay households for land, labor & capital Product Market-goods & services Households pay firms for goods and services Firms supply households with goods and services
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Command Economy The government determines what, how, and for whom goods and services are produced. Two types: Strong Command – where government makes all decisions (communism – China, Cuba) Moderate Command – where some form of private enterprise exists but the state owns major resources (socialism – France and Sweden) Advantages Guarantees equal standard of living for everyone Less crime and poverty Needs are provided for through the government Disadvantages Minimal choices Fewer choices of items No incentive to produce better product or engage in entrepreneurship
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Mixed Economy Combination of a market and a command economy Government takes care of people’s needs Marketplace takes care of people’s wants. Most nations have a mixed economy: United States, England, Australia Advantage—balance of needs and wants met by government and in marketplace Disadvantage— citizens have to pay taxes
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