ECONOMIC SYSTEMS

Ways that societies answer WHAT to produce, HOW to

produce, and FOR WHOM to produce.

THREE KEY SYSTEMS

Traditional economy

Command economy

Market economy

Each system provides the guidelines for

answering the three basic economic questions

considering availability of resources.

TRADITIONAL ECONOMY

Why is June a popular month for weddings?

Why are men wearing hats indoors considered to

be impolite?

In a traditional economy, habit and custom dictate

answers for production within a community.

The Inuit of Alaska and Northern Canada, or Amish

communities in various areas still provide examples

of traditional economies today.

TRADITIONAL ECONOMY

What is produced? • Continue to hunt, farm, and produce same products/services

that have been produced for generations. Inuit hunt, Amish farm and produce furniture and other goods.

How is it produced?• Amish reject modern technologies. Children fall into same

occupations as parents.

For whom is it produced?• Largely produced for community, but some goods produced

for trade or sale with others to meet needs that may not be met on own.

TRADITIONAL ECONOMY

Advantages:• Everyone knows role• Little uncertainty of WHAT to produce• Little uncertainty of HOW to produce- no new

technologies to learn (next year’s system)

Disadvantages:• New ideas discouraged• Strict roles effectively punish those who act

differently or break rules• Lack of progress leads to lower standard of living

COMMAND ECONOMY

Exists when a central authority makes most of the

decisions of WHAT, HOW, and FOR WHOM to produce.

(Stalin’s 5-year plans; Mao’s land reform policies)

The two most prominent examples of a command economy

today is North Korea and Cuba.

Russian and China maintained command economies for

most of the 20th century, but both have transitioned toward

market economies.

COMMAND ECONOMY

Advantages:• Direction of the economy can change drastically in a short

amount of time.• Many health and public services are available to the populace

for little or no cost.

Disadvantages:• Not designed to meet the wants and needs of consumers.• Does not give incentive to work (Academic tests)• Requires large decision making bureaucracy• Does not have the flexibility to handle minor day-to-day

problems.• People with unique skills or ideas are often unused.

MARKET ECONOMY

Consumers essentially decide WHAT and FOR WHOM

questions because their decisions act as votes.

Entreprenuers then will largely decide HOW items

will be produced in as efficient manner as possible in

order to increase profit margins.

Examples include the United States, Canada, Mexico,

Japan, South Korea, Germany, France and Great Britain

MARKET ECONOMY

Advantages:• Can adjust to change over time (cars produced during gas

crisis; vhs/dvd)• High degree of individual freedom (product/service;

occupation)• Relatively small degree of government interference

(laissez-faire)• Decision making is de-centralized, not in the hands of the

few• Variety of goods and services available• High degree of consumer satisfaction (what if customers

complaints are not remedied?)

MARKET ECONOMY

Disadvantages:• Does not provide the basic needs for entire population

(unemployment numbers)• Does not provide enough of highly valued services (health,

education), focused on items to be sold• High degree of uncertainty for workers and business in

times of change• Markets can fail if three conditions not met: 1) reasonable

competition; 2) resources must remain free to be moved from one activity to another; 3) consumers need access to adequate information for choices (when markets fail, businesses become too large, and some individuals receive incomes not reflective of productivity

ECONOMIC SPECTRUM

COMMON USES

Command Economy =

Communism

Mixed Economy = Socialism

Market Economy = Capitalism