CHAPTER 2

Economic
systems

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
CHAPTER OUTLINE

LEARNING OUTCOMES
2.1 DIFFERENT ECONOMICS SYSTEMS
2.2 THE TRADITIONAL SYSTEM
2.3 THE COMMAND SYSTEM
2.4 THE MARKET SYSTEM
2.5 THE MIXED ECONOMY
2.6 SOUTH AFRICA’S MIXED ECONOMY
2.7 THE MEN BEHIND THE SYSTEMS
IMPORTANT CONCEPTS

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LEARNING OUTCOMES

Once you have studied this chapter you should be able to

• describe the three central economic questions
• describe the major differences between traditional, command, market and
mixed economies
• describe the salient features of the market economy
• briefly describe the contributions of Adam Smith, Karl Marx and John
Maynard Keynes to economic science

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.1 Different economics systems LO: Describe the three central economic questions

2.1 DIFFERENT ECONOMIC

SYSTEMS
The three central economic questions
CENTRAL ECONOMIC QUESTIONS

What to How to For whom to Where to

produce? produce? produce? produce?

See In the real world 2-1 The geographical economy of South Africa (p. 46)

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command,
2.1 Different economics systems (cont.)
market and mixed economies

Classifying economic systems

Three coordinating mechanisms

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.1 Different economics systems (cont.) LO: Describe the major differences between traditional, command,
Classifying economic systems (cont.) market and mixed economies

Two basic criteria

• Property rights
• Coordinating mechanisms

Economic systems can be classified broadly as

• Market capitalism
• Planned socialism
• Market socialism

See Box 2-1 Classifying economic systems (p. 35)

See In the real world 2-2 The importance of institutions (p. 48)

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command,
2.1 Different economics systems (cont.)
market and mixed economies

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command,
2.2 The traditional system
market and mixed economies

2.2 THE
TRADITIONA
L SYSTEM
A system in which the
same goods are produced and
distributed in the same way by
each successive generation.

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command,
2.2 The traditional system (cont.)
market and mixed economies

Property rights
Ownership of the factors of production is determined by tradition

Coordinating mechanism
All decisions determined by tradition

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command,
2.3 The command system
market and mixed economies

2.3 THE COMMAND

SYSTEM
A system or economy in which
participants are instructed what to
produce and how to produce it by a
central authority, which also
determines how the output is
distributed.

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command,
2.3 The command system (cont.)
market and mixed economies

Property rights
State-ownership of all goods, services and factors of production (except labour)
 

Coordinating mechanism
All decisions made by a central authority

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command, market and mixed economies
2.4 The market system
LO: Describe the salient features of the market economy

2.4 THE MARKET SYSTEM

An economic system in which there is minimal
government intervention/central planning, and
where economic decisions result from the combined
interactions between buyers and sellers (private
individuals and companies) of goods and services,
and the effect of these on demand and supply (as
indicated by market prices).

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command, market and mixed economies
2.4 The market system (cont.)
LO: Describe the salient features of the market economy

Property rights
Private ownership of the factors of production

Coordinating mechanism
All decisions are voluntary exchanges and reflect in market prices

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command, market and mixed economies
2.4 The market system (cont.)
LO: Describe the salient features of the market economy

Characteristics of the market system

• Incentives
• Competition
• Negotiation
• Market capitalism
• Market prices

See Box 2-2 The winner takes all (p. 38)

See Box 2-3 The miracle of the market economy (p. 39)

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Describe the major differences between traditional, command, market and mixed economies
2.4 The market system (cont.)
LO: Describe the salient features of the market economy

The functions of price

• Rationing function
• Allocative function
See Box 2-4 The functions of prices in a market economy (p. 40)

The role of money

See Box 2-5 The role of money in a market system (p. 40)

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.5 The mixed economy LO: Describe the major differences between traditional, command, market and mixed economies

2.5 THE MIXED

ECONOMY
An economic system that displays
features of tradition, command and
the market, although one of the
three coordinating mechanisms
usually dominates.

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.5 The mixed economy (cont.) LO: Describe the major differences between traditional, command, market and mixed economies

Property rights
Primarily private, but also public, ownership of the factors of production

Coordinating mechanism
All decisions made by either the market or the state

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.6 South Africa’s mixed economy

2.6 SOUTH AFRICA’S MIXED

ECONOMY
• Imperfect competition
• Nationalisation
• Perfect competition
• Privatisation

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 LO: Briefly describe the contributions of Adam Smith, Karl Marx and
2.7 The men behind the systems
John Maynard Keynes to economic science

2.7 THE MEN BEHIND THE

SYSTEMS: SMITH, MARX
AND KEYNES
• Adam Smith (1723–1790)
• Karl Marx (1818–1883)
• John Maynard Keynes (1883–1946)

See Box 2-6 Some important authors and books in the history of economic thought (p. 42)

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
 IMPORTANT CONCEPTS

• Tradition • Negotiation • Privatisation

• Command • Capitalism • Nationalisation
• Market • Socialism • Perfect competition
• Economic system • Property rights • Imperfect competition
• Traditional system • Coordinating mechanism
• Command system • Free-market economy
• Market system • Mixed economy
• Market prices • Division of labour
• Incentives • Money
• Competition • Barter system

Chapter 2 Economic systems

ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e