Economic Systems

Economic Systems

 Ways of organizing society to decide what, how and for whom to produce
goods and services.
 Economic Types
1) Traditional Economy
2) Command Economy
3) Market Economy
4) Mixed Economy
Why there are Economic Systems?

Scarcity!!
 Never enough of everything to go around.
 Every society must find a way to divide what it has based on its need.
Countries need to determine:
 How to gather resources
 Who uses resources

 Three Basic Questions:

1) What to produce 2) How to produce 3) For whom to produce

How a country answers these three questions determine its economic system.
1) Traditional Economies

 What to produce ?
People follow customs and make what their ancestors made.

 How to produce?
People make goods the same way that their ancestors did.

 For whom to produce?

People make things for the village

-Goods are exchanged for other goods in a system called Bartering.

-Trading of goods without the use of money.
Strengths:

-Structured on customs , rituals or habits & shared beliefs.

-Stay relatively small and close-knit.
-Often work to support entire groups.
 Not just themselves or their immediate families.
-People have roles
 Usually don't change.
Weaknesses:

-Roles don't change

 Role in society was determined by parents.
-Slow to adapt new technology or new ideas
 They don't change.
-Low standard of living
 Lack of modern conveniences.
2) Command Economies

 What to produce ?
Governments make all the economic decisions.

 How to produce?
Governments decide

 For whom to produce?

Governments decide who gets what

 Example: Cuba ,Vietnam ,North Korea , Former Soviet Union

Strengths:

 Each person in the society knows his or her role.

 Simple to decide what , how and for whom to produce goods and services.
 Has the ability to change economic direction quickly
Weaknesses:

 Discourages new and innovative ideas.

 Low standard of living.
 Does not meet the wants and needs of the people.
 No incentives for the people to work hard.
 Ineffective at dealing with day to day problems in an economy.
3) Market Economies

 What to produce ?
Businesses decide what to produce based on supply , demand and the incentive
for profit.

 How to produce?
Businesses decide how much to produce based on consumers and suppliers.

 For whom to produce?

Consumers.
-Price determines who gets what resources.
-Buyers try to pay less.
-Sellers try to sell more.
-Where they agree to exchange is what we call price.
-Companies compete with each other in order to maximize profits.
-Governments do not tell companies what to charge , nor how much to produce.
-How much and how many is determined by supply and demand.
Strengths:

-Can adjust to change over time.

-Great deal of freedom
 The consumers make the decisions
-Little Government interference
-Large variety in goods and services
 High satisfaction
-Freedom of workers/producers
-Equal access to information
Weaknesses:

-There are winners and losers

-Individual must be competitive
-If people are unable to work then they may not be able to support themselves
4) Mixed Economies

-No economic system is purely command or market.

-There are some elements of command and market in all economic systems
-Most economies today are mixed
-Western Europe, Mexico, North America, Brazil
-Certain aspects of the economy are controlled by the Government
 What to produce ?
Businesses decide what to produce based on supply , demand and the incentive for
profit.

 How to produce?
Businesses decide how much to produce based on consumers and suppliers.

 For whom to produce?

Consumers.

 Many rules are created

 Many regulatory agencies
 May have positive or negative impacts on the economy.