Economic SystemsUnit 12 Notes

Different Economic Systems• Scarcity refers to the limited supply of

something.– Every country must deal with the

problem of scarcity since no country has everything that its people need/want.

• Every country must develop an economic system to determine how to use its limited resources to answer the three basic economic questions:– What goods/services will be produced?– How will goods/services be produced?– For whom will the goods/services be

produced?• The way a country answers these

questions determines its economic system.

Traditional Economy

• an economic system in which economic decisions are based on customs and beliefs

• People will make what they always have made & will do the same work their parents did.

• exchange of goods is done through bartering - trading without using money

Traditional Economy

• Who decides what to produce?– People follow their customs and make

what their ancestors made.

• Who decides how to produce goods & services?– People grow & make things the same

way that their ancestors did.

• For whom are the goods & services produced?– people in the village who need them

Traditional Economies

• Examples:– villages in Africa and South America – the Inuit tribes in Canada– the caste system in parts of rural India– the Aborigines in Australia

Command Economy

• The government makes all economic decisions & owns most of the property.

• Governmental planning groups determine such things as the prices of goods/services & the wages of workers.

• This system has not been very successful & more and more countries are abandoning it.

Command EconomyCountries with communist governments have command economies.– Examples: Cuba, former Soviet Union,

North Korea

• The government of Australia controlled one part of the economy in the past -- government-owned companies controlled telecommunications.– The government set the price for having a

phone, the cost of calls, and wages were the same in all parts of the country.

– In 1989, the company was made into a private business with stockholders owning the company.

Command Economy• Who decides what to produce?

– The government makes all economic decisions.

• Who decides how to produce goods and services?– The government decides how to make

goods/services.

• For whom are the goods and services produced?– whomever the government decides to

give them to

Market Economy• An economic system in which

economic decisions are guided by the changes in prices that occur as individual buyers and sellers interact in the market place.– Most of the resources are owned by

private citizens.

• Economic decisions are based on free enterprise (competition between companies).– Important economic questions are not

answered by government but by individuals.

– The government does not tell a business what goods to produce or what price to charge.

Market Economy

• Who decides what to produce?– Businesses base decisions on supply

and demand and free enterprise.

• Who decides how to produce goods and services?– Businesses decide how to produce

goods.

• For whom are the goods and services produced?– consumers

Market Economy

• There are no truly pure market economies, but Australia’s is close.– It is considered one of the most free

economies in the world.– Businesses operate without too many

rules from the government.– People are free to start a business and

can do so quickly.– Courts use the laws of Australia to

protect the property rights of citizens.

• In a truly free market economy, the government would not be involved at all.– There would be no laws to protect

workers form unfair bosses.– There would be no rules to make sure

that credit cards were properly protected.

• Many societies have chosen to have some rules to protect consumers, workers, and businesses (MIXED).– These rules reduce the freedoms that

businesses have, but they also protect the workers and consumers.

Mixed Economy

• Market + Command = Mixed• There are no pure command or market

economies. To some degree, all modern economies exhibit characteristics of both systems and are often referred to as mixed economies. – Most economies are closer to one type of

economic system than another.

• Businesses own most resources and determine what and how to produce, but the government regulates certain industries.

Mixed Economy

• Who decides what to produce?– businesses

• Who decides how to produce goods and services?– businesses, but the government

regulates certain industries

• For whom are the goods and services produced ?– consumers

Mixed Economies

• Most democratic countries fall in this category. (There are no truly pure market or command economies.)– Examples: Brazil, Mexico, Canada, UK,

US, Germany, Russia, Australia

Australia’s Economy

• one of the freest economies in the world

• It is technically a mixed economy, but it’s close to market because there are very few rules to restrict the market.

• government does not own major industry or business– prices are set by the agreement of

buyers and sellers rather than by government rules

Australia’s Economy• People are free to own their own

businesses and property.– They decide what they want to produce.

• Buyers and sellers are able to agree on prices, and competition between sellers helps to keep the prices good for buyers.

• Business owners and consumers can depend on good laws to protect them.– The courts are considered fair and honest.

• It is very easy to start a business in Australia – the paperwork usually takes less than a week!

Economy Continuum

Command

Market

Cuba Russia

Germany

USAustralia

UK