TOPIC 3: ECONOMIC STYSTEMS
Define an economic system.
An economic system is a system that a country chooses to allocate its resources
and distribute its goods and resources.
Explain what is the economic problem.
The economic problem is how to meet the endless wants and needs of people
with limited resources.
PLANNED ECONOMY
A planned economy is an economic system in which the government makes all the
decisions about the production and consumption of goods and services, based on
their idea of what is good for all the people of that country. Also called a
demand economy or directed economy.
Characteristics of planned economies
1) The government owns the land and natural resources, the factories and
the farms.
2) People are not allowed to own property.
3) The government decides what should be produced and how much it should
be sold for.
4) The government decides who gets how much of what is produced.
5) There is no competition with businesses offering goods and services at
different prices.
6) Workers don’t have a choice about what they want to
do.
7) Government gives workers everything they need to live,
including their food
Advantages of planned economies
1. They can be very stable because they are closed systems.
2. They can stimulate growth in industry because the government doesn’t
have to wait for capital.
3. The government can direct economic resources to areas where they are
most needed
4. They look after the welfare of all the government’s citizens.
5. They are more focused on citizens’ welfare than on profit or growth.
(Welfare not profit)
Disadvantages of planned economies
1. Can limit economic growth because there is no entrepreneurship.
2. There is no freedom of choice for consumers
3. It is an inflexible system that cannot adapt to change.
4. No incentive for people to do their jobs well.
5. Difficult to motivate workers to excel.
MARKET ECONOMY
A market economy is an unplanned economy in which land, property and
businesses are owned by private people, not the government.
Characteristics of a market economy
1) The aim of business in a market economy is to make a profit.
2) Entrepreneurs decide what goods and services to produce and how much
to charge for them based on what they think people want and are willing
to pay.
3) Businesses and people borrow money from banks and investors.
4) Workers can choose what kind of work they do and who they want to
work for.
Advantages of market economies
1. They are very flexible and can adapt quickly to change.
2. Individuals can choose what they want to produce and at what price.
3. Consumers can choose from a wide range of products.
4. They reward innovation and technological development.
5. There is economic freedom, so if people work hard they can improve their
lives.
Disadvantages of market economies
1.
Large difference between the wealth of citizens, some get rich other
stay poor.
2. Focus is on profit rather than welfare of citizens.
3. The government controls the economy as little as possible, so big
businesses can have too much control.
4. Make products available to consumers that can harm them.
MIXED ECONOMY
A mixed economy is a mixture of private and government control of the
economy.
The governments, as well as people and businesses, owns the land and natural
resources.
Most countries in the world today have a mixed economy with different degrees
of government control.
Characteristics of a mixed economy
1) Capital comes from banks, shareholders and the government.
2) Entrepreneurs decide what to produce.
3) The government passes laws to control certain economic activity.
Advantages of mixed economies
1. Combine government and private businesses for good economic growth.
2. They encourage private businesses to make contributions to citizens’
welfare.
3. They promote competition but protect citizens too.
4. The government encourage the economy to grow so incomes are more
equal.
Disadvantages of mixed economies
1.
Economic growth can be limited because government allocates resources
to citizens’ welfare.
2. Heavy government involvement in the economy through regulation makes
them open to corruption.
Explain what is meant by global economy.
It is the economy of the world
formed by interlinked national economies
that affect each other.
Draw a flow chart of the 3 economic systems
CLASS TEST
TOPIC 3
Write the questions and answers in your workbook.
(10 marks)
1) Identify in each of the following cases if a planned or market economy is
used:
(4)
1.1 People are not allowed to own property.
1.2 The aim of business is to make a profit.
1.3 There is no competition for businesses and they do not offer goods
and services at different prices.
1.4 The government owns the land and natural resources, the factories
and the farms.
2) Name three advantages and three disadvantages of a market economy.
(6)