CONOMIC SYSTEMS

OBJECTIVE: WHAT ARE THE DIFFERENT TYPES OF ECONOMIC

SYSTEMS?
WHAT IS ECONOMICS?

• Economics studies how individuals and

societies seek to satisfy needs and wants
through incentives, choices, and allocation
of scarce resources.
Technology
Land
Oil & fuel

Doctors
FACTORS OF PRODUCTION

• Economic Resources
• Natural Resources – raw materials found in nature that are used to produce goods
• Human Resources – people’s knowledge, efforts, and skills used in their work
• Capital Resources – used to produce goods and services (buildings, materials, and equipment)
• Entrepreneurial Resources - recognize the need for new goods or service

• Scarcity – shortage of resources

Economic Systems
The problem of scarcity leads to the three economic
questions:
WHAT TO PRODUCE? (What kinds of goods and services should
be produced?)
HOW TO PRODUCE? (What productive resources are used to
produce goods and services?)
FOR WHOM TO PRODUCE? (Who gets to have the goods and
services?

The way a society answers these questions determines its

economic system.
Economic Systems
An economy, or economic system, is the way a
nation makes economic choices about how the
nation will use its resources to produce and
distribute goods and services.
WHY ECONOMIC SYSTEMS?
• Nations use economic systems to determine how to use their limited resources
effectively.
• Primary goal of an economic system is to provide people with a minimum standard
of living, or quality of life.
• Different types of Economic Systems

• Traditional Economy
• Market Economy (free enterprise)
• Command Economy
• Mixed Economy
 TRADITIONAL ECONOMY
• Found in rural, under-
developed countries–
• Vanuatu
• Pygmies of Congo
•
Eskimos & Indian tribes
• Belarus
• Customs govern the
economic decisions that
are made
• Farming, hunting and
gathering are done the
same way as the
generation before
• Economic activities are
centered around the family
or ethnic unit
• Men and women are given
different economic roles
and tasks
• Advantages: people have
specific roles; security in
the way things are done
• Disadvantages: Technology
is not used; difficult to
improve
 MARKET ECONOMY (FREE
ENTERPRISE)
• Also called a Free Market • Supply and demand of
Economy or Free Enterprise goods and services
Economy determine what is produced
• Businesses and consumers and the price that will be
decide what they will charged.
produce and purchase and • Advantage—competition to
in what quantities have the best products and
• Decisions are made services
according to law of supply & • Disadvantage—huge rift
demand between wealthy and poor
• Note: a true market
economy does not exist.
They maintain that such a system cannot arise or persist
because some people will always have both the incentive and
the ability to use force against others. These authors offer
several reasons why, even if society starts out in a perfect
libertarian world without any states competing groups will
eventually form a coercive government.
 COMMAND ECONOMY
• The government (or central
authority) determines what,
how, and for whom goods
and services are produced.
• Two types:
• Strong Command – where
government makes all
decisions (communism –
China, Cuba)
• Moderate Command –
where some form of private
enterprise exists but the
state owns major resources
(socialism – France and
Sweden)
• Advantages
• Guarantees equal standard
of living for everyone
• Less crime and poverty
• Needs are provided for
through the government
• Disadvantages
• Minimal choices
• Fewer choices of items
• No incentive to produce
better product or engage in
entrepreneurship
• Also known as a Planned or
Managed Economy
MIXED ECONOMY
• Combination of a
market and a
command economy
• Most nations have a mixed economy:
• Government takes United States, England, Australia
• Advantage—balance of needs and wants
of people’s needs met by government and in marketplace

• Marketplace takes • Disadvantage—citizens have to pay taxes

care of people’s
wants.
WHICH ECONOMIC SYSTEM IS
BEST?
 The market system has proven to be best because it
promotes the goals of growth, freedom, & efficiency.
 Citizens are free to own their own property and use it in the
most efficient and profitable way.
 Command and traditional systems sometimes offer more
security but are not nearly as strong in efficiency, growth,
freedom, and environmental quality.
Economic Systems
The problem of scarcity leads to the three economic
questions:
WHAT TO PRODUCE? (What kinds of goods and services should
be produced?)
HOW TO PRODUCE? (What productive resources are used to
produce goods and services?)
FOR WHOM TO PRODUCE? (Who gets to have the goods and
services?

The way a society answers these questions determines its

economic system.