5. Economic Systems
The Three Economic Questions
And
The Four Economic Systems
Every society must answer three
economic questions:
What goods and services
should be produced?
• How should these goods and
services be produced?
• Who consumes these goods
and services?
•
Four Economic Systems
 Traditional
 Command
 Market
 Mixed
Traditional Economic System
Ritual
Habit
Custom
The basic economic
questions are
answered by
doing things the
way they have
always been done.
Advantages




Sets forth certain economic roles for
all members of the community
Stable, predictable, and continuous life
Revolves around family
Communities stay relatively close and
small
Disadvantages




Discourages new ideas, new technology,
and new ways of doing things
Stagnation and lack of progress
Lower standard of living – lack modern
conveniences
Have few mechanisms in place to deal
with disasters such as floods, drought
Command Economic System
or Centrally Planned
Central
Government
Or
Central Authority
Committee
Basic economic questions
of what, how and for
whom to produce are
answered by a central
planning authority.
Advantages




Central authority is in command of
the economy
Capable of dramatic change in a
short time
Little uncertainty over choice of
career, where to work, or losing job
Many basic education, public health,
and other public services available at
little or no cost
Disadvantages




Does not meet wants and needs
of consumers
Lacks effective incentives to get
people to work
Requires large bureaucracy,
which consumes resources
New and different ideas
discouraged, no room for individuality
Problems of a Centrally Planned Economy
Centrally planned economies face problems of
poor-quality goods, shortages, and diminishing
production.
Market Economic System
(Free Market, Capitalism)
Buyers and Sellers
Dollars
“Vote”
Basic economic
questions answered
by having buyers
and sellers make
economic decisions.
Advantages






Overtime, can adjust to change
Individual freedom for everyone
Little government interference
Decentralized – not concentrated in
the hands of a few
Variety of goods and services
High degree of consumer
satisfaction
Disadvantages



Rewards only productive resources;
does not provide for people too young,
too, old, or too sick to work
Workers and businesses face
uncertainty as a result of competition
and change – no guarantee for job
Does not produce enough public goods
such as defense, universal education, or
health care
Mixed Economic System
A combination of
both state-run and
private enterprises.
Mixed Economic System




A combination a traditional, market, and
command economies.
Need government intervention – create laws
protecting property rights and enforcing
contracts
Governments provide for national defense, roads
and highway systems, conservation,
environmental protection, education
Key is to balance control and freedom
The degree of government involvement in the
economy varies among nations.
Continuum of Mixed Economies
Centrally planned
Free market
Iran
North Korea
Cuba
South Africa
China
Russia
France
Botswana
Greece
United Kingdom
Canada
Peru
Hong Kong
Singapore
United States