CHAPTER 2
Economic
systems
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
CHAPTER OUTLINE
LEARNING OUTCOMES
2.1 DIFFERENT ECONOMICS SYSTEMS
2.2 THE TRADITIONAL SYSTEM
2.3 THE COMMAND SYSTEM
2.4 THE MARKET SYSTEM
2.5 THE MIXED ECONOMY
2.6 SOUTH AFRICA’S MIXED ECONOMY
2.7 THE MEN BEHIND THE SYSTEMS
IMPORTANT CONCEPTS
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LEARNING OUTCOMES
Once you have studied this chapter you should be able to
• describe the three central economic questions
• describe the major differences between traditional, command,
market and mixed economies
• describe the salient features of the market economy
• briefly describe the contributions of Adam Smith, Karl Marx and John
Maynard Keynes to economic science
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.1 Different economics systems
LO: Describe the three central economic questions
2.1 DIFFERENT ECONOMIC SYSTEMS
The three central economic questions
CENTRAL ECONOMIC QUESTIONS
What to
produce?
How to
produce?
For whom to
produce?
•Where to
produce?
See In the real world 2-1 The geographical economy of South Africa (p. 46)
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.1 Different economics systems (cont.)
Classifying economic systems
Three coordinating mechanisms
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Describe the major differences between traditional,
command, market and mixed economies
2.1 Different economics systems (cont.)
Classifying economic systems (cont.)
LO: Describe the major differences between traditional,
command, market and mixed economies
Two basic criteria
• Property rights
• Coordinating mechanisms
Economic systems can be classified broadly as
• Market capitalism
• Planned socialism
• Market socialism
See Box 2-1 Classifying economic systems (p. 35)
See In the real world 2-2 The importance of institutions (p. 48)
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.1 Different economics systems (cont.)
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Describe the major differences between traditional,
command, market and mixed economies
LO: Describe the major differences between traditional,
command, market and mixed economies
2.2 The traditional system
2.2 THE TRADITIONAL
SYSTEM
A system in which the
same goods are produced
and distributed in the same
way by each successive
generation.
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.2 The traditional system (cont.)
LO: Describe the major differences between traditional,
command, market and mixed economies
Property rights
Ownership of the factors of production is determined by tradition
Coordinating mechanism
All decisions determined by tradition
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.3 The command system
LO: Describe the major differences between traditional,
command, market and mixed economies
2.3 THE COMMAND SYSTEM
A system or economy in which
participants are instructed what to
produce and how to produce it by a
central authority, which also
determines how the output is
distributed.
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.3 The command system (cont.)
LO: Describe the major differences between traditional,
command, market and mixed economies
Property rights
State-ownership of all goods, services and factors of production (except
labour)
Coordinating mechanism
All decisions made by a central authority
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.4 The market system
LO: Describe the major differences between traditional, command, market and mixed
economies
LO: Describe the salient features of the market economy
2.4 THE MARKET SYSTEM
An economic system in which there is minimal
government intervention/central planning, and
where economic decisions result from the
combined interactions between buyers and
sellers (private individuals and companies) of
goods and services, and the effect of these on
demand and supply (as indicated by market
prices).
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.4 The market system (cont.)
LO: Describe the major differences between traditional, command, market and mixed
economies
LO: Describe the salient features of the market economy
Property rights
Private ownership of the factors of production
Coordinating mechanism
All decisions are voluntary exchanges and reflect in market prices
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.4 The market system (cont.)
LO: Describe the major differences between traditional, command, market and mixed
economies
LO: Describe the salient features of the market economy
Characteristics of the market system
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Incentives
Competition
Negotiation
Market capitalism
Market prices
See Box 2-2 The winner takes all (p. 38)
See Box 2-3 The miracle of the market economy (p. 39)
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.4 The market system (cont.)
LO: Describe the major differences between traditional, command, market and mixed
economies
LO: Describe the salient features of the market economy
The functions of price
• Rationing function
• Allocative function
See Box 2-4 The functions of prices in a market economy (p. 40)
The role of money
See Box 2-5 The role of money in a market system (p. 40)
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.5 The mixed economy
LO: Describe the major differences between traditional, command, market and mixed
economies
2.5 THE MIXED ECONOMY
An economic system that
displays features of tradition,
command and the market,
although one of the three
coordinating mechanisms
usually dominates.
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.5 The mixed economy (cont.)
LO: Describe the major differences between traditional, command, market and mixed
economies
Property rights
Primarily private, but also public, ownership of the factors of production
Coordinating mechanism
All decisions made by either the market or the state
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.6 South Africa’s mixed economy
2.6 SOUTH AFRICA’S MIXED ECONOMY
• Imperfect competition
• Nationalisation
• Perfect competition
• Privatisation
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
2.7 The men behind the systems
LO: Briefly describe the contributions of Adam Smith, Karl Marx
and John Maynard Keynes to economic science
2.7 THE MEN BEHIND THE SYSTEMS:
SMITH, MARX AND KEYNES
• Adam Smith (1723–1790)
• Karl Marx (1818–1883)
• John Maynard Keynes (1883–1946)
See Box 2-6 Some important authors and books in the history of economic thought (p. 42)
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
IMPORTANT CONCEPTS
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Tradition
Command
Market
Economic system
Traditional system
Command system
Market system
Market prices
Incentives
Competition
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Negotiation
Capitalism
Socialism
Property rights
Coordinating
mechanism
Free-market economy
Mixed economy
Division of labour
Money
Chapter 2 Economic systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
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Barter system
Privatisation
Nationalisation
Perfect competition
Imperfect competition