Economic Systems

Objective 2.01 Compare different types of economic systems: traditional, free enterprise, command and

mixed.

What is Economics?

Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources.

Oil & fuel

Land

Doctors

Technology

Factors of Production Economic Resources

Natural Resources – raw materials found in nature that are used to produce goods

Human Resources – people’s knowledge, efforts, and skills used in their work

Capital Resources – used to produce goods and services (buildings, materials, and equipment)

Entrepreneurial Resources - recognize the need for new goods or service

Scarcity – shortage of resources

Why Economic Systems? Nations use economic systems to

determine how to use their limited resources effectively.

#1 goal of an economic system is to provide people with a minimum :

standard of living or quality of life. Different types of Economic Systems

Traditional Economy Market Economy (free enterprise) Command Economy Mixed Economy

Traditional Economy Found in rural, under-developed

countries Vanuatu Pygmies of Congo Eskimos & Indian

tribes Belarus

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

Traditional Economic System An economic system in which decisions are made on the

basis of customs, beliefs, religion, habit, and so on. In traditional societies, scarce goods are often shared

evenly, or else on the basis of age and gender.

Market Economy (Free Enterprise)

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

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.

As supply increases demand decreases/price drops

As demand increases supply decreases/price goes up

Supply and Demand

Market Economy

Command Economy The government (or central

authority) determines what, how, and for whom goods and services are produced.

Two types: Strong Command –

where government makes all decisions

(communism – China, Cuba, North Korea )

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

Also known as a Planned or Managed Economy

Command Economy An economic system in which the government owns and

controls all facets of the economy. Command economies usually satisfy the needs and wants

of an elite class which controls the government and decision making.

Mixed Economy

Combination of a market and a command economy

Government takes 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

Import

Manufactured goods are brought IN for distribution

Export

Goods are manufactured and distributed globally (EXIT)

Trade

Deficit Imports - (buying) is greater than Exports -(selling)

Surplus Exports - (selling) is greater than Imports - (buying)