1. Chapter 21 Overview Notes: The 3 Basic Economic Systems in the World Today

2. So, every society must answer three basic economic questions:
People have unlimited wants – things we would like to
have or to do
People can never be wholly satisfied because we have
limited resources to meet these unlimited needs
We have only so much time, energy, and resources
to satisfy our needs and our wants
A landlocked nation would have different wants by
people than people in an island country.
So, every society must answer three basic economic questions:

3. Q: Who should get what we produce? Q: What must we produce?
Q: How should we produce it?
A: Society must choose based on its population and other available resources
A: Society must choose based on its resources
A: Society must choose based on its needs
And societies answer these three basic economic questions in different ways:

4. Some follow traditional ways to answer these three
questions by producing what their
ancestors produced, using the same time-honored
traditional methods
In other societies, a ruler or government tells
everyone what to do and decides who gets what is
produced
A third way to answer these questions is based on
economic freedom

5. hunting and gathering subsistence farming
Traditional Economic System:
What is produced and what each
person does is determined by
birth
The share of wealth is determined by
custom or one’s position in
society
hunting and gathering
subsistence farming

6. The **individual** has very little to say as to
Command Economic System:
The **individual** has very little to say as to
how the basic economic questions are
answered.
What is produced and what each person does
might be determined by a
small group of individuals.

7. formed first as a political movement in
Socialism
formed first as a political movement in
response to the injustices of industry and the
exploitation of workers
reformers wanted laws passed that would
protect the working class and even have
government to own some businesses for
the workers’ benefit, forming their own parties
across Europe
Later, socialists argued that the government
should own basic industries, and provide
essential services, like free
schooling, low-cost housing, inexpensive
public transportation, and a national health
program.
Examples: Iran, North Korea, Russia

8. bourgeoisie) paid the workers (“have-nots” /
Communism (Scientific Socialism) by Karl Marx
Workers create value through their labor; business
owners used their power to take advantage of
workers by taking for themselves most of the value of
what the workers produced
Capitalists (“haves” /
bourgeoisie) paid the workers (“have-nots” /
proletariat) just enough to survive and the rest that
was produced was kept by the owners; the owners
got richer and the workers got poorer and when
conditions for the workers got so bad, they would rise
up and overthrow their capitalist rulers in a violent
revolution
China, Cuba, Soviet Union

9. What is produced and what each person
Market Economic System:
What is produced and what each person
does is based on the market activity
Buyers and sellers decide for themselves
what goods and services will be produced
Individuals decide for themselves the
answers to the basic economic questions

10. Free enterprise system = people have free
choice of what to buy, where to work, and
what to make = people make their own economic
decisions
Right to own property (like homes, factories,
farms, businesses) and to use that property as
they see fit
Some invest their money or time in private
businesses to produce and sell goods and
services,
hoping to make a profit

11. choice in the type of goods available and how much they want to
Several producers make the same goods or promote the same services, giving consumers a
choice in the type of goods available and how much they want to
pay, forcing producers to attract consumers by improving
quality and reducing
prices, causing less efficient producers unable to
compete and to go out of business

12. In his book The Wealth of Nations (1776)
The Prophet of Free Enterprise was Adam Smith
In his book The Wealth of Nations (1776)
The law of supply and demand determines
prices and production and
only producers who make the best goods at the
lowest prices survive, benefiting the entire
economy
each person pursues his own interests in a free
enterprise system, but that an “invisible hand”
guides individual actions so that they actually
work for the common good
favored a “hands-off,” a “leave-alone,” a
“laissez faire” policy by governments

13. Many countries today have what is called a mixed economy
Many countries today have what is called a mixed economy. Since governments have no money of their own, they must tax their businesses and households and other entities, and use those funds for the communities’ expenditures of roads, education, welfare, the environment, etc. This economy is neither purely market nor command.