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Other Problems in Centrally Planned Economies

• (write one of the bold bullets in ‘disadvantages’ box )

• Expensive and inflexible government structure needed to manage the system

• Sacrifice of individual freedoms to • follow goals / (not individual) but instead the

goals of the society/government

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

2

Mixed Economies

• (write underlined information across first three questions)

• It is doubtable that any nation can exist successfully under a pure command economy or a pure market economy.

• Most economies mix features of both systems.

• (write underlined information across first three questions)

This image cannot currently be displayed.Continuum  of  Mixed  Economies

Centrally  planned Free  market

Source: 1999  Index  of  Economic  Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick

Iran

North  Korea

Cuba

China

Russia Greece Peru United  States

South  Africa France United  Kingdom

Botswana Canada Singapore

Hong  Kong

An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The

degree of government involvement in the economy varies among nations. Nations are placed on a continuum (a range with no clear divisions) of mixed economies. On one end are centrally planned economies and on the opposite end are free markets economies.

Comparing Mixed Economies(write examples of countries to match the type of

economic system’s goals in last box on table)

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Mixed Economy• Combination of a

market and a command economy

• Government takes 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

An  economic  system  is  the  method  used  by  a  society  to  produce  and  distribute  goods  and  services.

Four Economic Systems

Traditional  economies rely  on  habit,  custom,  or  ritual  to  decide  what  to  produce,  how  to  produce  it,  and  to  whom  to  distribute  it.

In  a  centrally  planned  economy the  central  government  makes  all  decisions  about  the  production  and  consumption  of  goods  and  services.

In  a  market  economyeconomic  decisions  are  made  by  individuals  and  are  based  on  exchange,  or  trade.

Mixed  economies are  systems  that  combine  tradition  and  the  free  market  with  limited  government  intervention.    

4

• Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services.

Markets exist because none of us produces all the goods and services we require to

satisfy our needs and wants.A market is an arrangement that allows buyers and sellers to exchange goods and services.

Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities.

Why Do Markets Exist?

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Free MarketsThis image cannot currently be displayed.

This image cannot currently be displayed.

This image cannot currently be displayed.

monetary  flow

physical  flow

monetary  flow

physical  flow

Circular  Flow  Diagram  of  a  Market  Economy

Households Firms

• In a free market economy, households and business firms use markets to exchange money and products.

• Households own the factors of production and consume goods and services.

Advantages of the MarketEconomic Growth

• Because competition encourages innovation, free markets encourage growth.

Economic Freedom• Free market economies

have the highest degree of economic freedom of any economic system.

Additional Goals• Free markets offer a

wider variety of goods and services than any other economic system.

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Market Economy (Free Enterprise)• Also called a Free Market

Economy or Free Enterprise Economy (write under “Free Market Economy” on table

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

• Decisions are made according to law of supply & demand (write under all 3 Questions (?) on table

• 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.

Comparing Economic Systems

Economic System

• Traditional • Market • Command• Mixed

Who answers the 3 ?’s

• Customs• Individuals• Central Government• Individuals with some

government involvement