Economic Systems
Three Essential Questions For Production
What to produce?
Which commodities are to be produced and in what quantities?
How to produce it?
Which techniques are to be adopted’? Labor or capital intensive?
Who gets it?
The solution of this problem is very simple - a commodity can be consumed
only by people who have more purchasing power.
Major Inputs to Produce “Stuff”
○ Land
○ Labor
○ Capital
■ All those man-made goods which are used in further
production of wealth.
Traditional Economy
○ Based on culture and rituals - focused on the
community as a whole
○ Everyone pitches in and everyone benefits
○ Ex: Small societies focused on farming and hunting -
traditional Inuit
Command Economies
○ Relies on gov’t to make all economic decisions
○ Government allocates resources and regulates
prices
○ Determines who gets “stuff’ and how it will be
distributed
Market Economies
○ Driven by consumers, whose decisions determine how the
industries and financial markets will operate
○ Individuals choose how their resources are used
○ Pure market - no government involvement - none are pure
market (the question is how much government?)
○ Adam Smith - “the invisible hand”...The invisible hand is a
metaphor for the unseen forces that move the free market
economy.
The Invisible Hand - Adam Smith
● The invisible hand is a metaphor for the unseen forces that
move the free market economy.
● Through individual self-interest and freedom of production
and consumption, the best interest of society, as a whole,
are fulfilled. The constant interplay of individual pressures
on market supply and demand causes the natural
movement of prices and the flow of trade.
Mixed Market Economies
○ Utilizes limited government involvement
while also applying free market concepts
○ “the hand of government”