Economic Systems
Traditional Economy
We Need A System
• We know the there are limited resources and
everybody needs to deal with the problem of
scarcity.
• So what kind of systems have we developed to
deal with this?
Traditional Economy
Traditional Economy
• Overall goal is survival
• It is about the group, what the individual
wants is really not important.
Advantages of a Traditional Economy
• Everyone knows their role.
• Life is generally predictable and stable.
• Almost everyone is taken care of, provided you
are doing your part.
Disadvantages of a Traditional
Economy
• This system resists change. It has been the
same for thousands of years.
• This lack of progress leads to a lower standard
of living.
Command Economy
Command Economy
• Government decides what goods and services
are produced.
• Individual consumers are not considered
• It is what the government thinks you need
Advantages In A Command Economy
• Everybody has a job.
• The Economy can change direction
quickly.
Disadvantages In A Command
Economy
• This system in not designed to meet the
“wants” of consumers.
• The basic incentive of this system is to do just
enough to meet quotas.
Market Economy
Market Economy
• It is all about the consumer and individual
choice
• As a consumer you make decisions based on
you own economic interests.
Advantages of a Market Economy
• High degree of individual freedom
• Relatively small degree of government
interference (Mixed Economy)
• Seemingly unlimited variety of goods and
services available to the consumers.
Disadvantages of a Market Economy
• The government does not provide for the
basic needs of everyone.
• The government does not provide certain
services that people value.
Which Economic System Are We?
• Mixed Economy
• Capitalism
• Based on 4 Important Principles
- Private Property
- Freedom of Choice
- Profit
- Competition
Fundamentals of a Market Economy
• Private property rights - rights of individuals
and groups to own property.
• Market – any place or situation in which
people buy and sell resources and goods and
services.
• Property rights are enforced by law
• Would this system work if buyers could not
trust sellers?
Limited Government
• Laissez faire – French term meaning “leave
things along”.
• Should the government leave the markets
alone?
• How does the government protect people
from the market?
Voluntary Exchange
• Two parties involved make an exchange
usually a good or service for money.
• This is guided by self interest
Consumer has the power
• A consumer can buy whatever they want.
• This creates competition within a market
• Self Interest – Both the buyer and seller use
self interest to get what they want.
Specialization
• People do what they do best
• A teacher can make money by teaching but
how can he or she get groceries for the week.
• Instead of growing them we go to the store
with money earned by teaching and buy
groceries.
Circular Flow Model
• This shows how households and business
meet in a market economy.
Product Market
• Market for goods and services
• The suppliers of this market are businesses
• The goods are sold for money (profit) which
keep the businesses going
Factor Market
• This market is where businesses go to get
things for production
• This means the factors of production.
We are included in this. We are the laborers,
land owners, owners of capital.
• We get income for doing this
• Firms get resources from the product market
which are used to produce goods.
Mixed Economy
• Most common economic system in the world.
• It has elements of all three systems
• In a mixed economy one of the three systems
dominates and is the most prevalent in that
economy.
• The U.S. is a mixed economy, which of the
three systems does the U.S. use the most?
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How does the U.S. use each system?
Traditional
Command
Market
The free market has led to some
interesting products!
What about other countries?
What’s the debate about Socialism?
Sweden
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Government pays for…
Child care ages 1-5
School ages 6-16
More schooling and college if you want to go
Health care
Dental
Pensions
Time off for raising a family
Sweden
• How do they pay for this?
• Citizens in Sweden pay about 60% of their
income in taxes.
Politics of A Market Economy
• Politicians need your vote
• An almost endless amount of research goes
into how people are likely to vote based on
who they are, and how they live.
• If the researchers do their job correctly they
will know who you will vote for before you
enter the booth.