1. “Introduction to Economic Systems” Critical Questions
What key economic questions must every society answer?
What basic economic goals do societies have?
What types of economic systems exist today?

2. What is an economic system?
The method used by a society to produce and distribute goods and services

3. The Three Basic Economic Questions that Determine a Societies Economic System
Because ALL economic resources are scarce, every society must answer three questions:
What goods and services should be produced?
Guns or butter?
How should these goods and services be produced?
What combination of factor resources should we use?
Who consumes these goods and services?
How will income be distributed?

4. Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services.

5. Four Economic Systems
An economic system is the method used by a society to produce and distribute goods and services.
Traditional economies rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it.
In a Command economy the central government makes all decisions about the production and consumption of goods and services.
In a Market economy economic decisions are made by individuals and are based on exchange, or trade.
Mixed economies are systems that combine tradition and the free market with limited government intervention.

6. Comparing Economic Systems
Who answers the 3 ?’s
Customs
Individuals
Central Government
Individuals with some government involvement
Economic System
Traditional
Market
Command
Mixed

7. Traditional Economy Found in rural, under-developed countries–
Vanuatu
Pygmies of Congo
Eskimos & Indian tribes
Customs govern the economic decisions that are made
Farming, hunting and gathering are done the same way as the generation before
Economic activities are centered around the family or ethnic unit
Men and women are given different economic roles and tasks
Advantages: people have specific roles; security in the way things are done
Disadvantages: Technology is not used; difficult to improve

8. Command Economy
The government (or central authority) determines what, how, and for whom goods and services are produced.
There are no pure Command Economies…the closest would be Communism
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
Also known as a Planned or Managed Economy

9. Command economies face problems of poor-quality goods, shortages, and diminishing production.

10. Other Problems in Centrally Planned Economies
Performance falls short of the set ideals
Fail to meet consumer needs and wants
Little individual incentives to work hard
Lack of improvement
Expensive and inflexible government structure needed to manage the system
Sacrifice of individual freedoms to pursue societal goals

11. Market Economy (Free Enterprise)
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.
Also called a Free Market Economy 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

12. Free Markets
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households
Firms
In a free market economy, households and business firms use markets to exchange money and products.
Households own the factors of production and consume goods and services.

13. Advantages of the Market
Economic Efficiency
As a self-regulating system, a free market economy is efficient.
Economic Growth
Because competition encourages innovation, free markets encourage growth.
Economic Freedom
Free market economies have the highest degree of economic freedom of any economic system.
Additional Goals
Free markets offer a wider variety of goods and services than any other economic system.

14. Mixed Economies
It is doubtable that any nation can exist successfully under a pure command economy or a pure market economy.
Most economies mix features of both systems.

15. Mixed Economy Combination of a market and a command economy
Government takes care of people’s needs
Marketplace takes care of people’s wants.
Advantage —balance of needs and wants met by government and in marketplace
Disadvantage —citizens have to pay taxes
United States, England, Australia, Japan, China…yes even China!
Most nations have a mixed economy

16. Organization of Mixed Economies
In a mixed economy, the government owns both land and capital. The government and the market decide what to produce, how much to produce, and how much to charge.
Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society.
Communism is a political system characterized by a centrally planned economy with almost all economic and political power resting in the hands of the government. Communist governments are authoritarian in nature.

17. Capitalism
Most decisions are made by individuals and businesses with a focus on minimal government interference.
Government involvement is in terms of regulations (laws), and services considered to be essential.
Is the type of mixed economy with the least amount of government involvement.

18. Comparing Mixed Economies
An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations. Nations are placed on a continuum (a range with no clear divisions) of mixed economies. On one end are centrally planned economies and on the opposite end are free markets economies.
Continuum of Mixed Economies
Centrally planned
Free market
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Iran
North Korea
Cuba
China
Russia
Greece
Peru
United States
South Africa
France
United Kingdom
Botswana
Canada
Singapore
Hong Kong
Comparing Mixed Economies