Economic SystemsEconomic Systems

UNIT FIVE NOTESUNIT FIVE NOTES

Economic SystemsEconomic Systems When deciding how to use its limited When deciding how to use its limited

resources, every country answers 3 questions resources, every country answers 3 questions about production and distributionabout production and distribution

What will be produced?What will be produced?How will it be produced?How will it be produced?For whom will it be produced?For whom will it be produced?

How a country answers these questions How a country answers these questions depends on the type of economic system they depends on the type of economic system they havehave

Four Types of Economic Four Types of Economic Systems:Systems:

1. Traditional Economy1. Traditional Economy

2. Command Economy2. Command Economy

3. Market Economy3. Market Economy

4. Mixed Economy4. Mixed Economy

Traditional EconomyTraditional Economy An economic system in which production An economic system in which production

and distribution questions are answered and distribution questions are answered by looking to the pastby looking to the past

People will make what they always made; People will make what they always made; will do the same work their parents didwill do the same work their parents did

Economic decisions are made by customs Economic decisions are made by customs and beliefsand beliefs

Example: Inuit; some parts of Africa and Example: Inuit; some parts of Africa and South AmericaSouth America

Command SystemCommand System An economic system in which production and An economic system in which production and

distribution questions are answered by central distribution questions are answered by central planners (government)planners (government)

Example: North Korea, former Soviet Union, Cuba, Example: North Korea, former Soviet Union, Cuba, *most Communist countries*most Communist countries

--Germany and Russia have moved away from --Germany and Russia have moved away from having a Command economy since 1991. Now they having a Command economy since 1991. Now they have a Mixed economy.have a Mixed economy.

Economic decisions are made by the governmentEconomic decisions are made by the government

Command System (Cont.)Command System (Cont.) Planners estimate what goods will be needed in Planners estimate what goods will be needed in

the future and work backward to decide what the future and work backward to decide what materials and workers are needed nowmaterials and workers are needed now

Planners can be wrong about future needs, and Planners can be wrong about future needs, and they do not provide people with many choicesthey do not provide people with many choices

Example: Farming--the government decided who Example: Farming--the government decided who would be farmers, what they would grow, and would be farmers, what they would grow, and how much would be turned over to the how much would be turned over to the governmentgovernment

Market EconomyMarket Economy An economic system in which production An economic system in which production

and distribution questions are answered and distribution questions are answered by prices and profitsby prices and profits

Economic decisions are based on Economic decisions are based on Free Free EnterpriseEnterprise

Most Democratic countries have a Most Democratic countries have a variation of a Market economy & a variation of a Market economy & a Command economy (Mixed economy)Command economy (Mixed economy) There are no truly pure Market There are no truly pure Market

economies, but the US and the United economies, but the US and the United Kingdom are closeKingdom are close

Market Economy (Cont.)Market Economy (Cont.) Businesses will make these products and Businesses will make these products and

provide those services to earn a profitprovide those services to earn a profit Services—in economics, work done for Services—in economics, work done for

others; hotels, restaurants, and doctors all others; hotels, restaurants, and doctors all provide servicesprovide services

Businesses will make things using whatever Businesses will make things using whatever materials, labor, and technology earn the materials, labor, and technology earn the highest profithighest profit

Standard of living is higher under a market Standard of living is higher under a market system than the others as it often has rapid system than the others as it often has rapid technological changetechnological change

Market Economy (Cont.)Market Economy (Cont.) The price of a good depends on how much of the The price of a good depends on how much of the

good is available and how many people want itgood is available and how many people want it Producers turn resources into goods and servicesProducers turn resources into goods and services Resources are raw materials, such as oil, Resources are raw materials, such as oil,

people’s labor, machinery, and mineralspeople’s labor, machinery, and minerals Governments can also be producers when they Governments can also be producers when they

provide goods such as roads and schools, or provide goods such as roads and schools, or when they provide services such as military when they provide services such as military production or health careproduction or health care

Market Economy (Cont.)Market Economy (Cont.)

Consumers, or buyers, purchase goods and Consumers, or buyers, purchase goods and servicesservices Consumer—a buyer and user of goods and servicesConsumer—a buyer and user of goods and services

Producers and consumers come together to Producers and consumers come together to exchange goods and servicesexchange goods and services

Exchange is giving up one thing in return for Exchange is giving up one thing in return for anotheranother In a traditional economy, exchange is most likely to In a traditional economy, exchange is most likely to

be in the form of barterbe in the form of barter

Mixed EconomyMixed Economy

Individuals own most resources and Individuals own most resources and determine what and how to producedetermine what and how to produce

Government regulates certain industriesGovernment regulates certain industries Example: China; most nationsExample: China; most nations Market + Command = MixedMarket + Command = Mixed