Types of Economic Systems

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What are the
3 main
questions???
What are the 3 main questions???
1. What goods/ services should be
produced?
2. How should they be produced?
3. For whom should they be produced?
Types of Economic Systems
There are 4 systems that differ based on
how they answer the 3 basic questions
(what, how, for whom to produce)
Trdn
Cmnd
Mrk
Mxd
The traditional commander
made his mark with his mix
Traditional Economy: system in which economic
decisions are based on customs & beliefs that have
been handed down from generation to generation
• “Things are done the way they always have been done”
• Economic decisions are based on customs & beliefs
handed from generation to generation
• If your father was a fisherman, you would be a
fisherman, your son would be a fisherman, etc…
Traditional Economy…
• ADVANTAGES
– You know what’s expected of you
– Family/ community ties are very strong
• DISADVANTAGES
– Change is discouraged & even punished
– Choices among consumer goods are rare
– Rare increase in the level of material well-being
– Things tend to stay the same
In Australia, Aboriginal tribes/ civilizations are
traditional economies
Command Economy: system in which the gov’t
controls the factors of production & makes all
decisions about their use
•
•
•
•
•
Also known as a “controlled system”
Decisions in gov’t are made by leaders only
One leader, small group of leaders, group of central planners
Leaders control all facets of the factors of production (LALAgsCAP’EN)
You get paid what your leader decides & you may not be able to
choose your own career
Command Economy…
• DISADVANTAGES
– Lack of incentives to work hard since gov’t set
workers’ salaries
– Little/ no room of “moving up”
– Lack of consumer choices
North Korea is a command economy – all economic
activity is gov’t planned
Market Economy: system in which individuals own
the factors of production & make economic decisions
through free interaction while looking out for their
own & their families’ best interests
• Also known as “capitalism”
• Opposite of a command economy
• Limited gov’t makes it possible
for individuals to make their own
economic decisions
• Individuals control all facets of
production (LALAgsCAP’EN)
• These decisions are guided by
market prices
Market Economy…. MARKETS:
• Market: process of freely exchanging goods &
services between buyers & sellers
– Voluntary exchange
– Worldwide – oil
– Local – babysitting/ snow shoveling
• High priced goods = relatively scarce product
• Low priced goods = relatively plentiful product
• *Prices can fluctuate between high & low – this
results in an incentive-driven system*
Market Economy…
• ADVANTAGES
– Freedoms: choose career, spend freely,
own property, take risks, earn profits
– Competition allows for a HUGE array of
goods & services to pick from
• DISADVANTAGES
– Too old/ too young/ too sick are pushed
out of the system & rely on charity or
hand-outs
Market Economy…Circular Flow of Income/ Output
• Circular flow of income & output: economic
model that pictures income as flowing
continuously between businesses & consumers
The flow of resources, goods &
services, & income is circular
Circular flow of income & output
– Dollars flow from businesses to individuals & back to businesses
– Factors of production flow from individuals to businesses, which use
them to produce goods & services that flow back to the individuals
Mixed Economy: system combining
characteristics of more than one type of
economy (market & command)
I own my own
business &
control
everything
BUT need to
follow
business
regulations
• Most countries in the world have
a mixed economy
• Private ownership of property &
individual decision making are
combined with gov’t intervention
& regulations
– United States
• most decisions are made by individuals within
the market
• BUT federal, state & local gov’ts make laws
protecting private property & regulating areas
of business
Your Turn….
Come up with a memory device….
How can you (we) remember the following:
- 4 types of systems: traditional, command, market, mixed
- We’ll vote on the best…. That person gets 5 smackers!!!
Circular flow of income & output
– Dollars flow from businesses to individuals & back to businesses
– Factors of production flow from individuals to businesses, which use
them to produce goods & services that flow back to the individuals
Major Economic Systems
(you’ll see this again… do it right!)
Type of system
Traditional
Command
Market
Mixed
Who makes decisions
based on the basic 3
questions?
Advantages
Disadvantages
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