Economy Types, Political Economies and Economic GoalsLesson 5

Economic System

•An economic system is the way in which a country organizes its economy based upon a distinct set of social customs, political institutions and economic practices.

The Three Basic Economic Questions

What to Produce?

As demonstrated by the production possibilities curve in the last activity, each country must make choices regarding what items to produce and how much of each item to produce using its productive inputs in the most efficient manner. 

How to Produce? 

Once the decision has been made regarding what to produce, each country must choose which resources (productive inputs) will be used and in what combinations. In a previous example, should more resources be applied to food or computer production?

For Whom to Produce?

The final decision is to determine how the output of goods and services will be distributed. Should the productive outputs be distributed based on social customs, personal wealth and ownership, or mandated by the government?

•Traditional economy is one in which economic decisions depend upon social customs and rarely changes from generation to generation.

•In these societies, religion and culture are more important than personal wealth and material possessions

Traditional Economy

Market Economy

• A market economy is one in which economic decisions are based on private ownership, where individuals are free to pursue their own self interest.

• This system is often referred to as capitalism.

• Individuals use their incomes to purchase goods and services. 

• The more income one earns, the more purchasing power they have.

• .

Market Economy (continued)

•The term market economy is used because this economic system relies on a market arrangement between buyers and sellers of products and resources.

•Product markets exchange consumer goods and services; resource markets exchange economic resources

Circular Flow Diagram

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Canada is a MIXED economy

•Has elements of both command and market economies

Mixed Economy

•A mixed economy is one that combines aspects of a market economy and a command economy; the economy uses both markets and government to make decisions.

•Most countries today fall under the mixed economy definition, however in varying degrees between private and public sector influence.

Comparison of Economy TypesEconomic System Advantages Disadvantages

TraditionalStability

Emphasis on spiritual and cultural aspects of life

Poverty

Lack of individual freedoms

Market

Individual consumers determine what is produced and ultimately how much they are willing to pay.

Encourages innovation and entrepreneurship

Instability in output due to changes in prices and/or employment levels

Private markets do not always consider the needs of society as a whole e.g. homeless shelters

If income is distributed based solely on earnings, some Individuals might not earn enough to obtain the basic necessities of life.

Command

More even distribution of income

Central planners can focus on economic growth by directing resources in a specific direction

Lack of individual freedoms

Central planning difficulties and errors in judgement.

Inefficient use of resources due to the lack of profit to motivate the efficient use of resources.