THREE TYPES OF ECONOMIES

Economics 101: Capitalism, Communism, and Mixed Economies

THREE ECONOMIC SYSTEMS

1) Traditional Economies – Formed by families and small clans, and based on tradition, cultures, and arbitrary decisions often.

2) Command Economies – The government controls the factors of production and every aspect of the economy in this system.

3) Free Market Economics – Individuals are given the freedom to choose what will be produced, how much, and what consumers will buy.

TRADITIONAL ECONOMIES

In traditional economies, the basic economic decisions are made by long-established patterns of behavior that are unlikely to change. Families and clans make choices about what to produce and how much based upon customs and traditions.

THE FAMILY IS THE BASIC ECONOMIC UNITIn traditional economics, the family is essential to dividing up

work, resources, and the consumption of goods.

CUSTOMS AND ASSESSMENT OF NEEDS

Year after year, traditional economies will use the same methods to produce goods. Hunters will use established techniques and weapons in order to find and harvest food. The food will be prepared by cooks in the village. How much of a product is gathered or hunted will often depend on the size of the clan and the needs of the group. In dividing up the food and goods produced, larger families will often receive more; however, status within the clan may also influence the distribution of goods.

FREEDOM IN TRADITIONAL SOCIETY?

On a day to day basis, members of a traditional community would have some limited amount of freedom. They don’t have to build tools or hunt on any particular day. However, the needs and wants of the tribe dictate everyone’s agenda from day to day. Therefore, freedom is very limited; everyone is dependent upon everyone else just to satisfy basic needs and survive.

TRADITIONAL SOCIETIES IN THE WORLD TODAY

Traditional Societies still exist in a number of places in the world today, but their numbers are dwindling in an interconnected world with an interdependent economy:

Central America

South America

Africa

Asia

COMMAND ECONOMIES

Command economies are economies where the government or central authority owns or controls the factors of production and makes the basic economic decisions. The government is usually in charge of key parts of the economy like transportation, communication, banking, or the manufacturing of certain goods.

THE GOVERNMENT CONTROLS ALL

In command economies like Maoism – a form of communist rule practiced in China while Mao Zedong was in power – the government controlled every aspect of people’s lives and the economy. They controlled transportation, communication, banking, and every farm production.

COMMAND ECONOMIES IN HISTORY

THE SOVIET UNION CUBA – THE CASTRO REGIME

LITTLE CHOICE FOR CONSUMERS

In a command economy, the government makes all of the decisions about where you work, what is produced, what may be purchased, and even how much it will cost. Therefore, consumers have little or no power in determining what goods will be produced and how much of them will be available. Or when. Or how much they will cost!

DISTRIBUTION OF GOODS IN A COMMAND ECONOMY

In a command economy, the decisions about who gets what is produced are based on the goals and values of a central authority. In the Soviet Union during the 1940s, they went where Joseph Stalin said they should. Mao, the Chairman in the People’s Republic of China, made decisions about where goods would go in communist China. If a greedy dictator decided to make himself and his friends rich, he might in this system. On the other hand, if the governments goals were to satisfy the basic needs of every individual in the nation, they might distribute goods much more equitably.

Vladimir Lenin promised people Land, Bread, and Peace when he rose to power; instead, they received Civil War, death, and famine.

MARKET ECONOMIES

A market economy is a system in which private individuals own the factors of production and are free to make choices about production, distribution, and consumption.

ECONOMIC DECISIONS IN THE FREE MARKET

“In a market economy, people are free to decide how to use land, labor, and capital.” Moreover, consumers are allowed to purchase whatever item they desire. People who are wealthier can purchase more items – and satisfy more of their wants – than the poor.

MARKET ECONOMICS CHARACTERISTICS

Who determines what to produce, how much of it to produce, and how to produce products in a market economy? Business owners and individuals make choices – without the government telling them what to do!

COMPETITION IN FREE MARKETS

How does competition influence prices and wages in a free market economy? When businesses compete against each other, consumer’s benefit. Products improve, and the prices of goods drop over time.

When workers compete for work, a similar phenomenon occurs. If there are more workers than there are jobs available, the wages of workers decline.

PROFITS

The profits earned by a business are the difference between the total cost of production and the total revenues received from buyers.

Total sales minus the cost of all goods, payroll, and other costs are your profits.

HOW WOULD THE PROFIT MOTIVE INFLUENCE BUSINESS OWNERS OR WORKERS IN A MARKET ECONOMY?

The desire to make money is what drives many of the innovations and improvements in our nation’s economy. Over the course of time, better products which satisfy more wants and needs are produced. This may be in the fields of transportation, communication, medicine, or entertainment.

VOCABULARY TERMS:

Invest: to invest means to use your money to help a business get started or to grow, with the hope that the business will earn a profit in which you can share. Free Enterprise: free enterprise refers to the system in which individuals in a market economy are free to undertake economic activities with little or no control by the government. Capitalism: Capitalism is a system in which people make their own decisions about how to save resources as capital and how to use their capital to produce goods and provide services.

MIXED ECONOMIES Mixed Economies are economies

which are a blend, or mixture, of the three basic systems – traditional, market, and command.

China is a mixture of command economics and capitalist experimentation – market economics.

The United States is, for the most part, a free market economy. However, the government has certain controls on the economy – just like a command economy.

CHINA’S ECONOMY

What style of government did China have in the 1980s? How did the economy of China change during the late 1980s and 1990s? Did the economy grow faster after these changes?

China was a command – or communist system at the start of the 1980s, as they had been since Mao Zedong led the Revolution in 1949.

During the late 1980s and early 1990s, the Chinese introduced free market reforms.

The economy of China exploded, growing rapidly.

THE UNITED STATES ECONOMY

What kind of an economic system is the United States of America perceived to have?

The United States economy is generally considered an example of free market capitalism. In reality, however, it is not. The United States has a mixed economy, and the national government influences consumers and entrepreneurs in many ways.

THE UNITED STATES ECONOMY

In what ways does the government influence the United States economy nevertheless. List at least three (3) ways that the government influences the economy through its actions.

Education

Mail Services

The Military

Transportation Systems

Medicaid, Medicare, Comprehensive Health Care