Economic Systems
How Does An Economy
Work?
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Nations must answer 3 basic Economic
question:
 What goods and services should be
produced?
 How should the goods and services be
produced?
 For who should the goods and services be
produced?
The way a nation answers these questions
defines their economy.
Types of Economic Systems
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All economic systems fall into one of two
broad categories:
 Market (or Capitalist) System
 Command (or Planned) System
No economy can be purely market or purely
command
Elements of both economies are found in all
systems this makes all economies mixed
A Pure Market Economy
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No government involvement in economic
decisions
The government lets the people answer the three
basic economic questions
 What? Customers decide through their
purchases
 How? This is left up to the individual business
–BUT- a business must be profitable
 Who? People who have money can buy more –
this encourages hard work and investments
A Pure Command Economy
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The Government controls the factors of
production and makes all the decisions The
government is responsible for answering the
three economic questions
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What? One person ( a dictator) or a group of
government officials (central planning committee)
decide what is to be produced
How? The government owns all the factors of
production and makes all the decisions about
production
Who? The government decide who receives what is
produced in the economy
Mixed Economies
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Some government involvement through
mandatory laws and regulations that
businesses follow
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The government provides social programs
for those who need help
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Labor Laws, Minimum Wage
Medicare, welfare
All economies are mixed they are classified
based on how much the government is
involved in the process
Continuum of Economic
Systems
Command
Economy
Communism
On the far left
Socialism
Left of center
but right of
communism
Market
Economy
Capitalism
On the far
right
Capitalism
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An economic system characterized by private
ownership of businesses and marketplace
competition
The government is concerned about its
people and takes care of those who cannot
care for themselves
The political system is a democracy with
leaders elected by the people
The United States and Japan are examples of
a Capitalist Economy
Socialism
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Increased government involvement in
people’s lives and the economy
The main goal is to keep prices low for all
people and to provide employment for many
The government runs key industries and
makes economic decisions
More social services for all and free or low
cost medical care
Canada, Germany, Sweden, Australia and
Great Britain are all examples of socialist
economies
Communism
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The government runs everything (Totalitarian
government)
Only one political party, the Communist party,
runs the government
All people able to work are assigned jobs –
there is virtually no unemployment
The government assigns housing, schools,
and occupations
There is little to no economic freedom
Cuba, North Korea, and China are examples
Economies In Transition
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The breakup of the Soviet Union is the best
example of a country changing from a
Command Economy to a Market Economy
State owned industries have been privatized
(government owned businesses are sold to
private citizens)
Today even socialist countries are selling
some of their government owned businesses
to individuals