Sections 1 & 2
KEY CONCEPT
• An economic system is the way in which a society
uses its resources to satisfy its people’s unlimited
wants.
WHY THE CONCEPT MATTERS
• An economic system determines what to produce,
how to produce, and for whom to produce.
Countries have mixed systems, but some systems
give more economic and political freedom and
create more wealth than others.
Types of Economic Systems
KEY CONCEPTS
• Economic system — the way in which a society
uses its resources to satisfy its people’s unlimited
wants.
• Three basic systems: traditional, command, and
market economies
• Mixed economies have features of more than one
type of system
TYPE 1: Traditional Economy
• Traditional economy centers on families, clans, or tribes
— decisions are based on customs and beliefs
• Everyone has a set role; no chance of deviating from pattern
• Good of the group always comes before individual desires
TYPE 2: Command Economy
• Command economy—government makes economic decisions
— determines what to produce; how to produce; who
gets products
• Wants of individual consumers rarely considered
• Government owns means of production: resources and factories
TYPE 3: Market Economy
• Market economy -driven by choices of consumers and producers
— consumers spend money, go into business, sell their labor
as they wish
— producers decide how to use their resources to make the
most money
• Consumers, producers benefit each other when they act in self-interest
KEY CONCEPTS
• Early societies all had traditional economies
• Traditional systems help societies survive
• Tend to be inefficient; do not adapt to change
TRAIT 1: Advantages and Disadvantages
• Advantages: little disagreement over goals, roles
— methods of production, distribution determined by custom
• Disadvantages: as result of resistance to change, less productive
— do not use new methods; people not in jobs they are best suited for
— low productivity results in low standard of living
TRAIT 2: Under Pressure to Change
• Many traditional economies under pressure to change
• Kavango people of Namibia lived as subsistence farmers for centuries
• Modern telecommunications brought Kavango images of outside world
— thousands have moved to cities
— a few have turned to commercial farming
Government Controls
KEY CONCEPTS
• Centrally planned economy—central government
makes all decisions
• Decides for whom to produce in part by setting
wages — only some people have money to buy
available products
EXAMPLE: Government Planning
• In all societies, government exerts some control over people’s lives
• In centrally planned economy, government exerts great control
— determines businesses to operate, amount produced each month
— determines who is employed, work hours, pay scales
EXAMPLE: Socialism and Communism
• Karl Marx influenced some societies to adopt command economies
— socialism—government owns some of the factors of production
— communism—no private property; little political freedom
• Authoritarian system requires total obedience to government
— communism is authoritarian socialism
• Democratic socialism established under democratic political process
— government owns basic industries
— other industries private
— central planners make decisions for government-owned industries
— central planners might control other sectors, such as health care
A New View of Economics
• Marx lived during Industrial Revolution
• Argued factory owners used workers as resource
— exploited workers by keeping wages low to
increase profits
— workers would rebel, establish classless society
• Wrote The Communist Manifesto (with Friedrich Engels), Das
Kapital
KEY CONCEPTS
• No pure command economies today
— modern telecommunications bringing
about change
• Some economies still have mostly command
elements
North Korea
• Communist North Korea used resources for military,
not necessities
• Built large army; nuclear weapons program
• In 1990s and early 2000s, millions died of hunger,
malnutrition
• In 1990s, production decreased and economy
shrank
• Since 2003, some market activity allowed
Impact of Command Economies
• In theory, command systems fair to everyone; In
practice, many disadvantage
• Central planners do not understand local conditions
• Workers have little motivation to be productive
or conserve resources
• Artificially low prices lead to shortages
• People sacrificed to carry out centrally planned
policies
Vocabulary
Economic System
Traditional Economy
The way in which a society uses its resources to
satisfy its people’s unlimited wants
centers on families, clans, or tribes; decisions
are based on customs and beliefs
Command Economy
Government makes choices on production
Market Economy
Economy driven by consumers and producers
Centrally Planned
Economy
central government makes all decisions
Socialism
government owns some of the factors of production
Communism
no private property; little political freedom
Authoritarian
system requires total obedience to government
Give a description, advantage and
disadvantage of the following.
1.Traditional Economy
2. Command Economy
3. Market Economy