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, and 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 or Centrally Planned
Economic System
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”
The Basic economic questions are 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/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
The basic economic questions are answered:
by combining traditional, state-run, and
private enterprises.
Mixed Economic System: No real
disadvantages
 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, and
can affect its society.
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
Essential Questions/Ideas
 How do societies provide the necessary items for their
people?
 Who gets to decide?
 Which economic system fails to worry about its people’s
wants?
 How does each system assign roles to play in the economy?
 When should government intervene in the economy?
 Which economic system do you think is most beneficial for
everyone?
 Why?