Economic Systems

Types of Economic Systems

● Economic system:
● how society uses resources to satisfy
people’s wants

● Three basic systems:

● Traditional
● Command
● market economies
Types of Economic Systems
● Traditional
Economy
● centers on families,
clans, or tribes
● decisions are based
on customs and
beliefs
● Good of the group
always comes before
individual desires
Characteristics of Traditional Economies
● Advantages and Disadvantages
● Advantages: little disagreement over
goals, roles
● methods of production, distribution
determined by custom
● Disadvantages: as result of
resistance to change, less productive
● do not use new methods; people not in
jobs they are best suited for
● low productivity results in low standard
of living
 Types of Economic Systems cont.
● Command Economy
● (centrally planned
economy) government
makes economic
decisions
● determines what to
produce; how to
produce; who gets
products
● determines who is
employed, work hours,
pay scales
● Wants of individual
consumers rarely
Government Controls
● EXAMPLE: Socialism and
Communism
● Karl Marx influenced some societies
to adopt command economies
● socialism—government owns some of
the factors of production
● communism—no private property; little
political freedom
● Authoritarian system requires total
obedience to government
● communism is authoritarian socialism
Karl Marx: Economic Revolutionary
● A New View of Economics
● Marx lived during Industrial
Revolution
● Argued factory owners used
workers as resource
● exploited workers by keeping wages
low to increase profits
● workers would rebel, establish
classless society
● Wrote The Communist
Manifesto (with Friedrich
 Government Controls
● Socialism and
Communism
● Democratic socialism
established under
democratic political
process
● government owns basic
industries
● other industries private
● central planners make
decisions for
government-owned
Command Economies Today

No pure command
economies today
● modern
telecommunicatio
ns bringing about
change
● Some economies
still have mostly
command
elements
Command Economies Today
● North Korea
● Communist North
Korea used resources
for military, not
necessities
● built large army;
nuclear weapons
program
● In 1990s and early
2000s, millions died of
hunger, malnutrition
● In 1990s, production
decreased and
economy shrank
● Since 2003, some
Command Economies Today
● Impact of Command Economies
● In theory, command systems fair to
everyone; In practice, many
disadvantages
● central planners do not understand
local conditions
● workers have little motivation to be
productive or conserve resources
● artificially low prices lead to shortages
● people sacrificed to carry out centrally
planned policies
 Types of Economic Systems cont.
● Market Economy
● driven by choices of
consumers and
producers
● consumers spend
money, go into
business, sell their
labor as they wish
● producers decide
how to use their
resources to make
the most money
● Consumers, producers
benefit each other
Fundamentals of a Market Economy
● 1: Private Property and Markets
● 2:Limited Government Involvement
● Laissez faire— government should not
interfere in economy
● Capitalism—system having private ownership
of factors of production
● says producers will create products consumers demand
● Actual market economies all have some
government involvement
Fundamentals of a Market Economy
● 3: Voluntary Exchange in Markets
● Voluntary exchange— traders believe
they get more than they give up
● 4: Competition and Consumer Sovereignty
● Consumer sovereignty —buyers choose
products, control what is produced
● Competition controls self-interested behavior
● sellers offer low price or high value to please
consumers, make profit
Fundamentals of a Market Economy
● 5: Specialization and Markets
● Specialization —people
concentrate their efforts in the
activities they do best
● encourages efficient use of
resources
● leads to higher-quality,
lower-priced products
 Circular Flow in Market Economies
● KEY CONCEPTS
● Circular flow model illustrates
how interactions occur in a
market
● Represents the two key decision
makers: households, businesses
● Shows the two markets where
households and businesses meet
● goods and services
 Circular Flow in Market Economies
● Factor Markets
● Factor market— market for the
factors of production
● land, labor, capital,
entrepreneurship
● Product Markets
● Product market— market
where goods and services
bought and sold
● includes all purchases by
Circular Flow in Market Economies
● Circular Flow
● Circular flow model shows how
market economies operate
● outside arrow shows flow of
money
● inside arrow shows flow of
resources and products
 Impact of Market Economies
● Advantages
● Individuals free to make economic
choices, pursue own work interests
● Less government control means
political freedom
● Locally made decisions mean better
use of resources, productivity
● Profit motive ensures resources used
efficiently, rewards hard work
● resulting competition leads to
 Impact of Market Economies
● Disadvantages
● Pure market economy has no way to
provide public goods and services
● Does not give security to sick or aged
● During U.S. industrial boom,
business owners rich, workers low
pay
● Businesses did not address problems
caused by industrialization
● Industrialized societies adopt some
Todayʼs Mixed Economies

● Mixed economy
●has elements of traditional,
command, market systems
● most common type of
economic system
●Traditional, command,
market economies adopt
elements from others
 Todayʼs Mixed Economies
● Life in a Mixed
Economy
● Family farming in U.S.
serves as example of
mixed economy
● traditional: all
members of family
help bring in harvest
● command: affected by
government—public
school, roads, Social
Security
 Todayʼs Mixed Economies
● Types of Mixed Economies
● U.S. basically has market system
● European countries greater mix of
market and command elements
● France—government controls some
industries; provides social services
● Sweden—state owns part of all companies;
lifelong benefits, high taxes
● Namibia—traditional; state supports
market, foreign investment
 Trends in Modern Economies
● Changes in
Ownership
● Nationalize is
to change from
private to
government
ownership
● Privatize is to
change from