Economic Systems

Economic Systems

• The way in which a country uses its resources to satisfy people’s needs and wants

• Economic systems are a response to scarcity within a society.

• Scarcity is not being able to have all that is wanted or needed.

Every Economic System must answer three important

questions:

1. What goods and services to produce and how much of each good or service to produce

2. How to produce these goods and services. In other words, what methods will be used to produce these goods and services?

3. For whom to produce these goods and services. In other words, who will receive the goods and services?

Types of Economic Systems

Traditional Economy• Economic decisions repeat those made in

earlier times (based on tradition).

• Beliefs and customs determine what is produced, how it is produced, and for whom it is produced.

• If some people are not there to do their part the system can break down. Farming, hunting and gathering, and cattle herding are often a part of a traditional economy.

• There are no examples of a traditional economy in Europe.

Command Economy• Economic decisions are made by the

government.

• Planners (government officials) decide what to produce, how to produce, and for whom to produce.

• Command decisions can be democratic or authoritarian.

• The former Soviet Union was an example of a command economy.

Market Economy• Consumers determine what to produce.• Producers determine how to produce.• Income depends on the productive

resources a person has to sell.• The law of supply and demand deter-

mines the price people pay for things.• Supply is the amount of goods available.• Demand is how many consumers want

the goods.• Other names for market systems are:

free enterprise, capitalism, and laissez-faire.

Mixed Economy• An economic system that has features of

traditional, command, and market systems• All modern economies are mixed

economies, but the mix depends on the country.

• The U.S. has a strong market economy; therefore, government plays a smaller role in the economy.

• Sweden has a stronger command element; therefore, the government plays a larger role in the economy.

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