Economic Systems
Unit 2 – Lesson 1 – Econ Systems
Mr. Mable
Econ 6120
EPF – SOL STANDARDS
EPF.1 The student will demonstrate knowledge of basic economic concepts
and structures by
• e) comparing the characteristics of market, command, traditional, and mixed
economies (BUS6120.034)
•
Day 1 The three basic questions
• Day 2 Command, traditional, and market economies
• Day 3 The free market and the US economy
EPF.1 The student will demonstrate knowledge of basic economic concepts
and structures by
• f) identifying Adam Smith and describing the characteristics of a market
economy
• (BUS6120.034)
• Day 1 Competition and the invisible hand
• Day 2 Property rights
3. Economic Systems
Unit Plan – Econ Systems
The problem of scarcity forces every society
to make difficult choices about how to use its
resources. In trying to decide how to
allocate those scarce resources, each
society must answer three critical questions.
How those questions are answered
determines the type of economic system
(market, command, traditional, mixed) that is
present.
What is an Economic System?
• The institutional framework
• of formal and informal rules
that a society uses
• to decide the 3 economic
questions
• •Manufacturing. Transformation of
materials into intermediate and finished
goods.
• •Regulation. The way the production
system is controlled and regulated. Mostly
the role of governments, but increasingly
of international multilateral agreements.
• •Circulation. Activities that link the
elements of the production system.
Includes transport and communications.
• With the emergence of logistics, the
elements of circulation and distribution are
increasingly embedded. Further, all these
elements, especially manufacturing, are
using inputs for their processes, also
known as factors of production. They
include land (including natural resources),
capital and labor. The enterprise itself is
often considered as the fourth factor as its
main purpose is the organization of the
The Three Basic Economic
Questions
• Many entrepreneurs find themselves
asking thousands of questions before
starting a business.
These can be
compressed into three basic
economic questions:
• 1. What goods and services will be produced?
• 2. How will these goods and services be
produced?
• 3. Who will consume these goods and
services?
Four Types of Economies
• Traditional
• Free Market (Pure Capitalism)
• Command Economy (Communism)
• Mixed Economy (Blend of the two above)
Traditional Economy
• An economy in which customs and habits
from the past are used to resolve most
economic issues of production and
distribution.
• traditional economies are inefficient and
lack an incentive to grow and change
• “What has always been done.”
TRADITION SONG
• That’s Just the Way It Is by Bruce Hornsby
and the Range
• http://www.youtube.com/watch?v=cOeKid
p-iWo
Traditional Economy
• the same tools and resources
• The kind of work people do
• the goods people produce, and the way
people use and
• Farming, hunting, and gathering are
• conducted in the same ways as the
generation before.
Traditional Economy
• A traditional economy is less dynamic
compared to
• other economic systems. People produce
only enough
• goods for their own needs and leave a
very small
• amount for trading. In a traditional
economy, the
• questions of what people are supposed to
produce, how
Traditional Economy
• much they produce, and who will receive
the
• production are very predictable. People
follow their
• production traditions most of the time. To
some
• extent, custom governs the economic
decisions that are
• made in a traditional economy,
TRADITION VIDEO
• “Tradition”, from Fiddler on the Roof (the
first 3:50 of the clip are sufficient)
http://www.youtube.com/watch?v=gRdfX7ut
8gw
Are there any traditional
economies still today in the
world?
Someone give an example
Example of traditional
• The Inuit people of northern Canada offer a
good example of a traditional economy. They
use the snow to make igloos with doors
covered with seal intestines; they also make
summer tents from animal skins. Their main
food source is flesh from seals, caribou, and
other animals. They sew their animal skin
clothes with thread. Most of the tribe’s
economic decisions are based on religious
and traditional beliefs. Elders of clans have
the most power to make decisions.
Inuit people
What are your family holiday
traditions?
•
•
•
•
•
Thanksgiving?
Where do you go?
What do you eat?
What do you buy?
Who makes these decisions?
TODAY
Due to modern technology, traditional
economies are not common in the world.
The Industrial Revolution, which introduced
more advanced technical methods into the
agricultural process and used machines to
produce goods, transformed the world and
led eventually to the modern market
economy.
Historically, What Nations have
had total control of their
economies?
Command Economies
Command economy
• – An economy in which most economic
issues of production and distribution are
resolved through central planning and
control.
Command Economy
• A command economy takes the freedom
to choose from the individuals in society
and transfers it to a smaller group. It is
impossible for this group to have all of the
information necessary to efficiently and
effectively allocate resources in a way that
will satisfy the greatest number of wants.
Command Economies TODAY
CHINA
Command Economies TODAY
NORTH KOREA
Command Economies TODAY
CUBA
FREE MARKET ECONOMY
Free Market economy
• – An economy that relies on a system of
interdependent market prices to allocate
goods, services, and productive resources
and to coordinate the diverse plans of
consumers and producers, each of them
pursuing their own self-interest.
Free Market
• All market economies have several basic
characteristics in common including private
property, free enterprise, self-interest,
competition, a price system and limited (laissezfaire) government. Property rights, defined as
individual ownership and control of resources
and products, are a fundamental characteristic
of a market system. Property rights affect the
way markets allocate resources. If property
rights are well defined and enforced and
markets are competitive, a market system
ensures that resources are used in their most
valued manner.
MIXED ECONOMY
Mixed Economy
• Mixed economy – An economic system
that exhibits characteristics of more than
one type of economic system. Most
modern systems are mixed and have
various aspects of command, market and
traditional systems within them.
• Virtually all modern economies, including
the economy of the United States, contain
some parts of the command, market and
traditional economic systems within them.
What characteristics do wealthy
nations have in common?
•
•
•
•
•
•
•
•
•
•
Investments in human and physical capital
Economic freedom
Lower taxes
Less government regulation
Sound monetary policy
Protection of property rights
Incentives to save, invest, increase productivity
Competitive markets
Low inflation
Political stability
• The American economy uses a market
system to make many allocation decisions,
and it is important for students to
understand why the market system is used
so extensively. Students also should be
able to compare the characteristics of a
market system with alternatives used more
extensively in some other countries. With
this understanding, students can assess
the benefits and costs of alternative
Econ Video
• What is Econ?
• http://www.youtube.com/watch?v=ayRnEa
iWnTk
• Do this last!
• What is the difference between what a
government does and what an economy
does?
What 3 Basic Questions do all
economies have to answer?
• What to produce?
• How to produce?
• For whom to produce?
What are the main types of economies?
Who owns the resources?
Who decides?
Main Types of Economies
• Command
• Market
• Tradition
• Mixed
Why are some nations rich and others poor?
Which of these nations do you think is the
wealthiest?
A
B
C
D
E
Hans Roslings:
Four Minutes 200 years
http://www.youtube.com/watch?v=jbkSRLYSojo