2.
01 Economic Systems
Objective 2.01 Compare
different types of economic
systems: traditional, free
enterprise, command and
mixed.
Why Economic Systems?
Nations use economic systems to
determine how to use their limited
resources effectively.
Primary goal of an economic system
is to provide people with a minimum
standard of living, or quality of life.
Different types of Economic Systems
Traditional
Economy
Market Economy (free enterprise)
Command Economy
Mixed Economy
Three Fundamental Economic Questions
Guns vs. Butter
1. What to Produce?
The problem of scarcity imposes a restriction
on the ability to produce everything we want
during a given period.
Three Fundamental Economic Questions
2. How to Produce?
Vs.
How do we mix technology and scarce resources in order to
produce goods and services?
Three Fundamental Economic Questions
3. For Whom to Produce?
Society must have a method to decide
who will be “rich” and who will be “poor”.
Traditional Economy
Found in rural, Economic activities
under-developed are centered around
countries– the family or ethnic
Vanuatu unit
Pygmies of Congo Men and women are
Eskimos & Indian given different
tribes economic roles and
Belarus tasks
Customs govern the Advantages: people
economic decisions have specific roles;
that are made security in the way
Farming, hunting things are done
and gathering are Disadvantages:
Traditional Economies
Relies on habit, or ritual to decide how to answer the 3
economic questions.
• Revolves around the family
• Work divided along gender lines
•Slow to adopt new technology or ideas
Market Economy (Free Enterprise)
Also called a Free Supply and demand of
Market Economy or goods and services
Free Enterprise determine what is
Economy produced and the
Businesses and price that will be
consumers decide charged.
what they will produce Advantage—
and purchase and in competition to have
what quantities the best products and
Decisions are made services
according to law of Disadvantage—huge
supply & demand rift between wealthy
and poor
Free Market Economies
Individuals and privately owned businesses own the factors of production and decide
how to answer the 3 economic questions
• Specialization of tasks makes the economy more efficient
• Everyone acts in their own self-interest
• No government intervention
• Laissez Faire –
•French phrase to “leave things alone” or “hands-off”
•Voluntary Exchange: a trade in which the parties involved anticipate
that benefits will outweigh the costs
Command Economy
The government (or Advantages
central authority) Guarantees equal
determines what, how, standard of living for
and for whom goods everyone
and services are Less crime and
produced. poverty
Two types: Needs are provided
for through the
Strong Command – government
where government
makes all decisions Disadvantages
(communism – China, Minimal choices
Cuba) Fewer choices of items
Moderate Command – No incentive to
where some form of produce better product
private enterprise or engage in
exists but the state entrepreneurship
owns major resources
(socialism – France and Also known as a
Centrally Planned (Command) Economies
The government owns both the land and capital and decides on behalf of
the people how to answer the 3 economic questions – requires absolute
loyalty from the people
• Communism - Government controls all aspects of production
• Socialism – government owns some FOP –
•Some private ownership of business in socialism
Attempts to
provide for
everyone
Mixed Economy
Combination of Most nations have
a market and a a mixed economy:
United States,
command England, Australia
economy Advantage—
Government
balance of needs
takes of and wants met by
people’s needs government and in
Marketplace
marketplace
Disadvantage—
takes care of citizens have to
people’s wants. pay taxes
Mixed Economies
Elements of traditional, command, and market economies
- Most common economic system
Traditional - Farming Market – Public Market Command – Highways
Mixed Economies
The people answer the 3 economic questions with some
intervention from the government to account for market failures
• Economic decisions are made by individuals with government oversight
• Government is a key component of economic activity
• All nations exist in the “mixed economy continuum”
Centrally Planned Free Market
Iran France United United States
N. Korea Sweden Kingdom
Russia Singapore
Cuba Peru Canada
My Pizzeria
How would my pizzeria function
under different economic systems?
My Pizzeria in a Free Market
I answer the basic economic
questions!
I determine how much cheese and
pepperoni goes on the pizza
I determine the quality of the cheese
and pepperoni
I set my employees wages
I set my business hours
My Pizzeria in a Command
Economy
The government answers the basic
economic questions
The government sets the amount
of cheese and pepperoni on each
pizza
The government determines
quality of cheese and pepperoni
The government sets employees
wages
The government sets business
hours
My Pizzeria in a Mixed Economy
The Government and I both
answer the basic economic questions
I determine the amount of cheese
and pepperoni on the pizzas;
government determines the quality
of cheese and pizza
I set employee wages; government
sets minimum wage for employees
I determine business hours;
government determines whether I
am safe to be open or not
