Chapter 13.3

Three Types of Economies

What is Economics?

•Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources.

Oil & fuel

Land

Doctors

Technology

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

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 Economy or Free Enterprise Economy

• Businesses and consumers decide what they will produce and purchase and in what quantities

• Decisions are made according to law of supply & demand

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

• Advantage—competition to have the best products and services

• Disadvantage—huge rift between wealthy and poor

• Note: a true market economy does not exist.

Continued…………………………….•Competition in all aspects of economy

(jobs, products, services, etc)•Profit seeking economy: “How much profit

will I make on this good/service and is it worth the risk?”

•Also called free enterprise and capitalism▫FE=free to undertake economic activities▫C=people make their own decisions on how

to save capital and spend capital resources.

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

•Government

takes care of people’s needs

•Marketplace takes care of people’s wants.

•Most nations have a mixed economy: United States, England, Australia

•Advantage—balance of needs and wants met by government and in marketplace

•Disadvantage—citizens have to pay taxes

Modern-day (mixed)EconomiesThe Economy of China:• Before 1980’s was a

command economy

• One party government w/control of major resources

• 1980-1990’s the government moved toward a mixed economy when privately owned companies and overseas investment was allowed

The Economy of the U.S: • Considered a free enterprise

economy

• Individuals/businesses own factors of production

• Businesses free to compete

• Consumers free to buy/consume what they want

• Little government intervention (there are some parts of the economy that are controlled by government)