types of economic systems
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The Three Economic Questions
• What goods and services to produce?
• How should goods and services be produced?
• For whom will goods and services be produced?
How a country answers these questions determines what type of economic system it has.
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Economic Models
• Traditional•Market•Command
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Traditional
Answers the three economic questions based on the past. Customs, culture, and religion dictate decision-making such as production of goods and services.
Family and community ties are highly valued. Agricultural Change occurs very slowly.
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Pure Market
Individuals own and control all economic resources. Government does not intervene in the economy.
An economy must have some degree of government intervention in the economy. (examples; the enforcement of contracts and the settling of disputes)
Regulation is required for stability. An industry/business should have the ability to self-regulate. Failure to do so serves as an invitation for government to intervene.
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Pure Command
• Government owns and controls all economic resources and makes all economic decisions. Although some communist economies may seem this way, everyone has at least some property and decision making authority.
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Economic SystemsAll economic systems are “mixed” economies: Capitalism Democratic Socialism Authoritarian Socialism (Communism)
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Capitalism
• Economic resources are owned and controlled by individuals.
• Prices are set through the interaction of supply and demand.
• Government has a limited role in the economy (only for the protection of society).
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Advantages of Capitalism
• Market efficiency• Economic prosperity• Personal freedom Freedom of choice; products, careers, location, and education• Private property• Competition; lower prices, better quality and more variety• Lower taxes
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Disadvantages of Capitalism
• Instability• Economic inequality• Does not meet everyone’s needs• Fewer public goods and services• Higher Unemployment
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Democratic Socialism• Major economic resources are owned by
government (transportation, communication, and utilities). Other resources are owned by individuals.
• Individuals maintain basic human rights.• Government leadership is determined
through elections with peaceful transition of leadership.
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Advantages of Democratic Socialism
• Economic equality• Low unemployment• More public goods and services Universal healthcare Retirement pensions University education• Meets the needs of most people.
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Disadvantages of Democratic Socialism
• Redistribution of incomes• High taxes• Less freedom• Lack of incentive• Lack of motivation• Government sets prices for government owned
resources.• Government decides the allocation of
government owned resources.
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Authoritarian Socialism
Government owns and controls the economic resources and answers the three economic questions through collective decision-making.
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Advantages of Authoritarian Socialism
• Nationalism• Focus on a strong military• Equality (classless society)• State supplies many public goods including; employment housing healthcare education• Meets everyone’s needs• Job security
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Disadvantages of Authoritarian Socialism
• Government transitions are usually violent• Government rules through propaganda and
fear.• Redistribution of income• Limited decision-making/choice• Lack of motivation/incentive• High taxes