1. Economic Systems
UNIT FOUR NOTES

2. Economic Systems What will be produced? How will it be produced?
When deciding how to use its limited resources, every country answers 3 questions about production and distribution
What will be produced?
How will it be produced?
For whom will it be produced?
How a country answers these questions depends on the type of economic system they have

3. Four Types of Economic Systems:
1. Traditional Economy
2. Command Economy
3. Market Economy
4. Mixed Economy

4. Traditional Economy
An economic system in which production and distribution questions are answered by looking to the past
People will make what they always made; will do the same work their parents did
Economic decisions are made by customs and beliefs
Example: Inuit; some parts of Africa and South America

5. Command System
An economic system in which production and distribution questions are answered by central planners (government)
Example: North Korea, former Soviet Union, Cuba, *most Communist countries
--Germany and Russia have moved away from having a Command economy since Now they have a Mixed economy.
Economic decisions are made by the government

6. Command System (Cont.)
Planners estimate what goods will be needed in the future and work backward to decide what materials and workers are needed now
Planners can be wrong about future needs, and they do not provide people with many choices
Example: Farming--the government decided who would be farmers, what they would grow, and how much would be turned over to the government

7. Market Economy
An economic system in which production and distribution questions are answered by prices and profits
Economic decisions are based on Free Enterprise
Most Democratic countries have a variation of a Market economy & a Command economy (Mixed economy)
There are no truly pure Market economies, but the US and the United Kingdom are close

8. Market Economy (Cont.)
Businesses will make these products and provide those services to earn a profit
Services—in economics, work done for others; hotels, restaurants, and doctors all provide services
Businesses will make things using whatever materials, labor, and technology earn the highest profit
Standard of living is higher under a market system than the others as it often has rapid technological change

9. Market Economy (Cont.)
The price of a good depends on how much of the good is available and how many people want it (Supply & Demand)
Producers turn resources into goods and services
Resources are raw materials, such as oil, people’s labor, machinery, and minerals
Governments can also be producers when they provide goods such as roads and schools, or when they provide services such as military production or health care

10. Market Economy (Cont.)
Consumers, or buyers, purchase goods and services
Consumer—a buyer and user of goods and services
Producers and consumers come together to exchange goods and services
Exchange is giving up one thing in return for another
In a traditional economy, exchange is most likely to be in the form of barter

11. Mixed Economy
Individuals own most resources and determine what and how to produce
Government regulates certain industries
Example: China; most nations
Market + Command = Mixed