15-Mar-21

Economic Systems
Compare different types of economic systems: traditional,
free enterprise, command and mixed

Dr. Islam Abdelbary

Assistant Professor - Arab Academy for Science and Technology
Senior economic researcher – Plymouth University

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How Does An Economy Work?

• Nations must answer 3 basic Economic

question:
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• What goods and services should be produced?

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• How should the goods and services be produced?

• For who should the goods and services be produced?

• The way a nation answers these questions

defines their economy.

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Every society has some system that
transforms that society’s scarce
resources into useful goods and
services.

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Three Basic Economic Questions

• What to produce?
This question asks what people will make and sell. Many
countries produce goods or services based on which
resources are available and which will make the most money
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for the lowest cost.

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• How to produce?
This question asks how people will make a good or service.
Manufacturing is a way to produce. Sometimes production is
outsourced, or sent to other countries, in order to keep cost
down.
• For whom to produce?
This question asks whom goods are services will be made for.
People in market economies will produce for a target market.
This will allow them to make the greatest profit.

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• What, How, and For Whom?

• Goods and services are the objects that people value and
produce to satisfy human wants.
• What?
• In the United States, agriculture accounts for less than
1 percent of total production, manufactured goods for
19 percent, and services for 80 percent.
• In low-income Ethiopia, agriculture accounts for
36 percent of total production, manufactured goods for
17 percent, and services for 47 percent.

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• Figure 1.1 shows these

numbers for the United
States, China, and Ethiopia.
• What determines these
patterns of production?
• How do choices end up
determining the quantity of
each item produced in the
United States and around
the world?

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Types of Economic Systems

• All economic systems fall into one of two broad

categories:
• Market (or Capitalist) System

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• Command (or Planned) System

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• No economy can be purely market or purely
command
• Elements of both economies are found in all systems
this makes all economies mixed

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Economic Systems

Pure
Pure Market
Command

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What determines which type of

economy a country has?

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• The type of economy is determined by the extent of government
involvement in economic decision making.

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Traditional Economy
• In a traditional economy, goods and services are produced by
the family for their personal consumption.

• A traditional economy is shaped largely by custom or religion.

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• In a traditional economy, resources are allocated according to

long-lived practices from the past. There is little surplus
(something extra) and little trade (or exchange of goods).

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Traditional Economy

A traditional economy is
the type of economy found
in less developed nations,

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usually in rural areas.

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A Pure (Free) Market Economy

• No government involvement in economic
decisions
• The government lets the people answer the
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three basic economic questions

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• What? Customers decide through their purchases

• How? This is left up to the individual business –BUT- a
business must be profitable
• Who? People who have money can buy more – this
encourages hard work and investments

Note: a true market economy does not exist.

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Market Economy (Free Enterprise)

• Supply and demand of goods and
services determine what is produced
and the price that will be charged.
• Advantage:

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• competition to have the best products and

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services.
• Market economies responds quickly to
people’s wants
• Factors of production which are profitable
will only be employed.
• There is wide variety of goods and services in
the market.
• New and better methods of production are
encouraged thus leading to lower cost of
goods and services.

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Market Economy (Free Enterprise)

• Supply and demand of goods and services determine what is produced
and the price that will be charged.
• Disadvantage:
• huge gab between wealthy and poor
•
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Public goods may not be provided for in Market economy.

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• Market economies encourage consumption of harmful goods.

• Prices are determined by the demand and supply of goods.
• Social cost may not be considered while producing goods and services.
It may lead to unemployment because machines will be more
productive than men.

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A Pure (Free) Market Economy

Capitalism
• An economic system characterized by private
ownership of businesses and marketplace
competition
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• The government is concerned about its people and

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takes care of those who cannot care for themselves

• The political system is a democracy with leaders
elected by the people
• The United States and Japan are examples of a
Capitalist Economy

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“It’s Your money, not the government’s”-

The 40th president of the United States ( 1981 – 1989)

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A Pure Command Economy

• Also known as a Planned or Managed Economy

• The Government controls the factors of production and makes

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all the decisions The government is responsible for answering

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the three economic questions

• What? One person ( a dictator) or a group of government
officials (central planning committee) decide what is to be
produced
• How? The government owns all the factors of production
and makes all the decisions about production
• Who? The government decide who receives what is
produced in the economy

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Command Economy
• Advantages:
• Guarantees equal standard of living for everyone
• Needs are provided for through the government
• There is no competition between firms thus resulting in less

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wastage.

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• Government ensures that everybody is employed.
• Less gap between poor and rich
• Less crime and poverty

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Command Economy
• Disadvantages:
• Fewer choices of items
• No incentive to produce better product or engage in
entrepreneurship
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• Production of goods is decided by government thus there is

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no choices for consumer.

• Businesses usually are less efficient because of lack of profit
motive.

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Command Economy
• Two types:
• Strong Command – where government makes
all decisions (communism –The Soviet
Union).

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• Moderate Command – where some form of
private enterprise exists but the state owns
major resources (socialism – China, Cuba)

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Mixed Economies
• Some government involvement through laws and
regulations that businesses follow
• Labor Laws, Minimum Wage
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• The government provides social programs for those who

need help
• Medicare, welfare

• All economies are mixed they are classified based on

how much the government is involved in the process

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Mixed Economy
• Mixed of a market • Most nations have a
mixed economy:
and a command United States,
economy England, Australia
• Government takes • Advantage—balance

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of people’s needs of needs and wants
met by government
• Marketplace takes and in marketplace
care of people’s • Disadvantage—
wants. citizens have to pay
taxes

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Examples of a Mixed Economy

• In France health care is free, university costs very

little if you get in (many do not) and taxes are high.
However, there are also private industries based out
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of France.
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• In United Kingdom health care is free, university is

cheap, but citizens can purchase private health
insurance and attend private universities if they
choose.

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Mixed Economy
American Mixed Economy
• While the United States is mostly a free market economy, it
does have elements of a command economy.

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President Roosevelt introduced the principles of a

mixed economy to the US by expanding the
government, providing welfare and establishing
Social Security for the elderly.
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Features of American Free Market Economy

1. Economic Freedom: individuals have the right to choose
2. Competition: more than one producer of good/services
insures choice
3. Private : individuals have the right to own including business.

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4. Self-Interest: individuals make decisions based on what is best

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for them.
5. Voluntary Exchange: individuals may freely buy and sell goods
6. Profit Motive: individuals are driven by a desire to profit
(make money)

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Features of American Command Economy

1. Government regulation of some business practices

• Ex. Wages, labor hours, safety practice.
2. Government limits certain choices
• Ex. Cannot buy or produce certain goods/services
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3. Government provides aid to the needy

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• Ex. Medicare, Medicaid, welfare, Obamacare

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United Kingdom
79%
Germany
Russia 71%
51%

Pure
Pure Market
Command
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Canada
81%
Brazil
Cuba
57%
28%

Pure
Pure Market
Command
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Australia
83%

Pure
Pure Market
Command
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Economies In Transition

• The breakup of the Soviet Union is the best

example of a country changing from a
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Command Economy to a Market Economy

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• State owned industries have been privatized

(government owned businesses are sold to
private citizens)
• Today even socialist countries are selling some
of their government owned businesses to
individuals

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Bernie Sanders in 2021

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Command Mixed Economy Free Market

Economy
Central ownership of Individuals and Private ownership of
resource businesses as decision resources
makers for the private
sector
Centrally planned Government as decision Business decisions are
economy maker for the public driven by the desire to

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sector. earn a profit

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There is no competition A greater government There is a great deal of
( one producer ) role than in a free competition
market economy
Lack of consumer Consumers have many Consumers have many
choice choices choices
Example: Cuba and Most common Examples: USA
Former Soviet Union economic system today
Examples: England,
Germany, Russia

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Economic Systems & Hunger Games

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Activity 2.2
• Objective :
• to negotiate which economic system is better to
apply in developing countries ?

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• Roles

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• Moderator,
• First team : representative free market concepts .
• Second team : representative command market concepts.
• Rest of student will be observers and will divided in to 3
groups: one adopt free market concepts , second adopt
command market concepts , the last group is neutral or not
convinced with both concepts and try to find other
economics system .

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