Economic Systems: Economic Systems: GoalsGoals

Methods developed by different

societies as per their individual

goals and needs.

Economic Systems…

Definition:

It is a system through which each economy decides how to allocate the national resources, production, and consumption within the Economy.

Types of Economic Systems

There are four types of Economic Systems.

1- Traditional Economic System 2- Command (Planned) Economic System 3- Market Economic System 4- Mixed Economic System

Every society must ask 3 Key Questions…

• 1) What goods and services should be produced?

• 2) How should these goods and services be produced?

• 3) Who will consume these goods and services?

• The way a country answers these questions determines its economic system.

The Three Questions

• We will see that every Economy can be classified to which of the four forms of Economic Systems they belong by answering these three simple Questions.

• What?• How?• Who?

1.) What to Produce?

This question attempts to determine which sort of goods and Services will be produced in an economy.

• What are society’s needs and wants?•What resources should be used?•What are the opportunity costs? •Should we be manufacturing more necessities or Luxuries?

2) HOW to produce:

• What resources to be used and/or developed to produce goods

• Land + labor + capital = product• Should we rely on Human Resources such as

Labor? • Or should we use more Capital instead such as

machines?• How much quantity should we employ of each

of them? • Training required to produce and/or serve

Once we have decided what to produce, we have to decide how we should produce these goods and services.

3) For whom to Produce?

• This question relates to the final market of the goods and services we are going to produce.

• Whom are we going to sell these goods and services?

• Should we produce for rich people or the middle class?

• Should we produce for youth or the elderly?

• Distribution of products • Societies must decide how to distribute? the available goods and services

• This question is answered by how societies decide to distribute income:

• They do this with

• Factor Payments: Factor Payments: • The income people receive for supplying

factors of production • (land, labor, capital, and entrepreneurship)

• Ex. 1.) Landowners receive rent

• 2.) Workers receive wages,

• 3.) Those who lend money to build factories or buy machinery receive payments called?

• Interest

• 4.) Entrepreneurs earn profits if their enterprises succeed

• How much?• How much should we pay the owners of

the factors of production?• How do we decide how much a

particular piece of land is worth?• How much should Ms. Morse really

earn?• How much should your doctor earn?• How much should Stephen Curry earn? • Or, what should the interest rate be?

Social Values and Goals! Social Values and Goals! • This is the heart of the differences

between economic systems today.

Each society answers the questions of distribution

based on its unique combination of social

values and goals

Goals and Values

• 1.) Economic Efficiency (production distribution)• Maximizing output of goods and services from the resources available

• 2.) Economic Freedom patriotism• Allowing individuals to make economic choices about earning income, owning

property, and purchasing goods and services.

• 3.) Economic Equality (production = access ?)• Dividing resources in a way that is considered fair

• 4.) Economic Security & Predictability • Assuring people that goods and services will be available: providing aid for

retirement, in difficult times, injuries, layoffs, natural disasters safety net

5.) Economic Growth & InnovationA nation’s economy must grow for a nation to improve its standard of living (economic prosperity)

•Additional Goals

environmental

full employmentmedical care

Prioritize:No matter how a nation prioritizes its goals, one fact remains the same:Achieving any economic goal comes only with some kinds of economic trade-off

Economies and Values

ECONOMIC SYSTEMS

Traditional Economy Market Economy Mixed EconomyCentral or Command

Economy

Oldest formOf economic

Systems

Bartering

AgriculturalAnd resource

Based

Immediateneeds

As in WesternEurope

The market &consumer

DeterminesSupply &Demand

Central Gov’tDeterminesWants &

Needs of the Consumer

Focus on In-dustrial goodsAnd little on Consumerdemands

In the US,Both Market&

CommandSystems are

used.

Market forcesControl mostConsumer

Goods

Gov’t directsIndustry in

Need areas