Comparing Economic

SystemsOur Goal:

To understand the differences between different types of economic systems.

To understand the different incentives for each type of economic system.

Think back to yesterday…

What does the word “economy” mean? A system for producing and exchanging

goods and services among a group of people

What is an “economic system”? A way people use resources to make and

exchange goods

What economic systems did we learn about? Traditional (barter) economy

Command economy

Market economy

Mixed economy

An important vocabulary

word…

INCENTIVE

What is an incentive?

An incentive is a motivator—something that makes a person want to behave in a certain way

Some examples: Frequent Flyer Miles in this class—if you have no missing assignments, you get a 5 bonus point pass. What’s the incentive? The 5 bonus point pass!

Traditional Economy

(a.k.a., Barter Economy)

“That’s How We’ve Always Done It-Ville”

Only produce what you need to get by and to trade—not concerned with profit

People trade goods and services

Rarely use money

You give what you want and you get what you want

Example: I farm potatoes. Mr. Jones farms corn. I want some corn and he wants some potatoes, so we barter, meaning we go back and forth until we decide how much we are each willing to give up in exchange for what we want.

The incentive: only producing

what you need for yourself and

to trade for other things you

need, then getting what you

need while giving up as little as

possible of what you have to

offer.

Helpful Hints

The name: Barter pretty much speaks for itself. To remember traditional, think: they bartered in the olden days and they were also very traditional back then.

Why didn’t they use money? It wasn’t necessary. Since people mostly made the things they needed, they simply had to exchange items. Nowadays, often work in jobs where they aren’t necessarily producing an object. Instead, they get paid money, so they can buy what they want. (Example: a teacher, a doctor, a lawyer)

Command Economy

(a.k.a., planned economy)

“We Do What We’re Told-Ville”

The government decides what

goods and services will be

produced and who will produce

them.

The government owns the

businesses and resources.

People work for the government

and the government tells them

what to make and how.

In return, the government divides

up wealth equally among the

people—there are no super-rich

or super-poor people—everyone

is pretty much the same.

Also, the government often

provides basic needs like health

care to its people.

Example: North Korea—The

government of North Korea owns

the industries that produce all of

their goods.

The incentive: produce

exactly what you are told and

you will be taken care of.

Helpful Hints

The name: To remember command, think: the government is COMMANDING people to make certain things and do certain jobs. To remember planned, think: The government PLANS everything out—what goods will be made, who will make what, how much they will make, and how they will use the resources.

What might be one of the major DISADVANTAGES of a command/planned economy? Since everyone is paid the same, people may

not be very motivated to be creative or innovative or to work harder.

Market Economy

“Make as Much as We Want-Ville”

It’s all about supply and demand!

Demand: People want certain goods

and services (they DEMAND them)

Supply: Certain resources are

available and people are able to do

certain jobs (these are SUPPLIED)

The goods and services that are

produced are determined by what is

demanded and what is supplied

Market Economy, continued

How is this different than a command economy? In a command economy, the government determines

what will be produced and who will do it

In a market economy, it’s all about what people want, things like: What kinds of products do people want?

What kinds of services do people need?

What jobs are people able to do?

What resources are available?

Together, these things determine what will be made and who will make it.

Driven by the desire to produce more and make more

Incentive: The harder you work, the better the goods and services you can produce, and this means more… $$$$! (PROFIT)

Mixed Economy

Many economies are a combination of the command and market economies.

The US is actually a mixed economy!

Why? People can own their own businesses (market) BUT the government

makes rules for businesses (command)

People earn a salary or wage depending on their level of skill and experience (market) BUT the government has established a minimum wage (command)

Companies can decide what they want to produce and how much they should make (market) BUT the government can tell manufacturers if something is needed during a time of war (command)

People can go to college and pick their own major (market) BUT the government runs pre-college education (command)

Other command examples in the US: government controls waste removal and the mail system

Incentive: people are able to work hard and be successful as a result, but the government is good at providing some things that would be hard for individuals to do

Let’s Review

Today we learned more about the four economic systems

Traditional (Barter)

Command (Planned)

Market

Mixed (Command + Market)

We also learned about the various incentives for each—something that motivates people