Economic Systems
Today’s Objective: To be able to
differentiate between the three
economic systems and their
characteristics.
Types of Economic Systems
• Economic system:
▫ How society uses resources to satisfy people’s
wants
• Three basic systems:
▫ Traditional
▫ Command
▫ Market economies
Economic Systems
• Read through the economic systems sheet
• With a partner list 3 examples of elements of
each type of economic system that we find in the
US economy
• Then list the pros and cons of each system
Types of Economic Systems
• Traditional Economy
▫ centers on families,
clans, or tribes
 decisions are based
on customs and
beliefs
▫ Good of the group
always comes before
individual desires
Characteristics of Traditional Economies
• 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
Types of Economic Systems cont.
• Command Economy
▫ (centrally planned economy)
government makes economic
decisions
 determines what to produce;
how to produce; who gets
products
 determines who is
employed, work hours, pay
scales
▫ Wants of individual consumers
rarely considered
▫ Government owns means of
production: resources and
factories
Command Economies Today
No pure command
economies today
Some economies
still have mostly
command elements
Command Economies Today
• 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
Command Economies Today
• Impact of Command Economies
▫ In theory, command systems fair to everyone; In
practice, many disadvantages
 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
Types of Economic Systems cont.
• 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
Fundamentals of a Market Economy
• 1: Private Property and Markets
• 2:Limited Government Involvement
▫ Laissez faire—government should not interfere in
economy
▫ Capitalism—system having private ownership of
factors of production
 says producers will create products consumers
demand
▫ Actual market economies all have some
government involvement
Fundamentals of a Market Economy
• 3: Voluntary Exchange in Markets
▫ Voluntary exchange—traders believe they get
more than they give up
• 4: Competition and Consumer Sovereignty
▫ Consumer sovereignty—buyers choose products,
control what is produced
▫ Competition controls self-interested behavior
 sellers offer low price or high value to please
consumers, make profit
Fundamentals of a Market Economy
• 5: Specialization and Markets
▫ Specialization—people concentrate their
efforts in the activities they do best
 encourages efficient use of resources
 leads to higher-quality, lower-priced
products
Impact of Market Economies
• Advantages
▫ Individuals free to make economic choices, pursue
own work interests
▫ Less government control means political freedom
▫ Locally made decisions mean better use of
resources, productivity
▫ Profit motive ensures resources used efficiently,
rewards hard work
 resulting competition leads to higher-quality, more
diverse products
Impact of Market Economies
• Disadvantages
▫ Pure market economy has no way to provide
public goods and services
▫ Does not give security to sick or aged
▫ During U.S. industrial boom, business owners
rich, workers low pay
▫ Businesses did not address problems caused by
industrialization
▫ Industrialized societies adopt some government
control of economy
Today’s Mixed Economies
• Types of Mixed Economies
▫ U.S. basically has market system
▫ European countries greater mix of market and
command elements
 France—government controls some industries;
provides social services
 Sweden—state owns part of all companies; lifelong
benefits, high taxes
 Namibia—traditional; state supports market, foreign
investment
Campus Parking Options
• Leave things as they have been
• First-come, first-served
• Markets and a price system
• Democracy
• Random choice
Traditional, Command, Market, Mixed?
• An economic system heavily influenced by habits, customs,
and religious beliefs.
• Government directly influences and vastly controls business
practices due to ownership of natural and capital resources.
• Privately owned factors of production (i.e., factories and
machines).
• Prices are influenced by supply and demand.
• An economic system that combines elements of all the other
basic systems.
• Characterized by very low unemployment rate.
• Considered synonymous with a capitalistic economy.
• Individual freedom is limited (roles of individuals are static
from generation to generation).
Dreaded Disease
• Read through the dreaded disease scenario
• With a partner answer the questions
• Keep in mind what we’ve discussed about
economic systems and opportunity cost
Dreaded Disease
• What would be the “market” solution to the
problem?
▫ Benefits?
▫ Opportunity cost?
• What would be the command solution to this
problem?
▫ Benefits?
▫ Opportunity cost?
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