Economic Systems
Chapter 1.3
1-3 Economic Systems
• Goals / “I can…”
▫ Identify the 3 economic ?s
▫ Differentiate among the main types of economic
systems
▫ Describe the economic systems of the United
States
Every society has some system that
transforms that society’s scarce
resources into useful goods and
services.
Key Economic Questions
1. What goods and services are to be produced?
▫ What is needed?
▫ What is wanted?
2. How should the goods and services be
produced?
▫ What methods/machinery/technology?
▫ What resources should be used?
3. For whom should the goods and services be
produced?
▫ Who needs them?
▫ Who wants them?
What to Produce?
• Nations differ in their wants like people do.
▫ Providing technology vs. providing food, clothing,
and shelter
▫ Emphasis in space travel vs. military force
• Meeting everyone’s wants is a challenge.
▫ Decisions must be made on which kinds of goods
and services are valued the most and best serve
the nation.
How to Produce?
• What combination of resources can be used
most effectively and efficiently?
▫ Human resources?
▫ Natural resources?
▫ Capital resources?
• What resources are available to use?
For Whom to Produce?
• What citizens will benefit from the production of
goods and services?
• Whose needs and wants are the most critical?
• How will the goods be distributed?
• Should the goods and services be shared
equally?
In the U.S., with our plentiful supply of goods &
services, what you buy is largely determined by
the amount of money you have and are willing
to spend
Types of Economic Systems
• Economic system:
▫ A country’s economic system is classified based on
how the country satisfies needs and how resources
are distributed.
• Four basic systems:
▫ Traditional
▫ Command - the government answers the basic
economic questions
▫ Free Enterprise/Market Economy – the
individuals interact in the marketplace to answer the
basic economic questions.
▫ Mixed – ALL economies are mixed
Types of Economic Systems
• Traditional Economy
▫ centers on families,
clans, or tribes
 decisions are based
on customs and
beliefs
▫ Good of the group
always comes before
individual desires
▫ Exchange of goods
done through
Bartering
 trade w/o $$
Characteristics of Traditional Economies
• Advantages and Disadvantages
▫ Advantages: little disagreement over goals, roles
 methods of production, distribution determined by
custom
▫ Disadvantages: as result of resistance to change,
less productive
 do not use new methods; people not in jobs they are
best suited for
 low productivity results in low standard of living
 change & growth occur slowly
 countries are less developed
Types of Economic Systems cont.
• Command Economy
▫ (centrally planned economy)
government makes economic
decisions
 determines what to produce;
how to produce; who gets
products
 determines who is
employed, work hours, pay
scales
▫ Wants of individual consumers
rarely considered
▫ Government owns means of
production: resources and
factories
Economic Systems
In a Controlled / Command
economy the government
controls all resources.
 Cuba has a state-controlled planned economy.
 Most of the means of production are owned and run by the
government.
 Most of the labor force is employed by the state.
 The Cuban government sets most prices and rations goods.
 Any firm wishing to hire a Cuban must pay the Cuban
government, which will pay the employee in Cuban pesos.
 The average wage for a Cuban is 334 regular pesos per
month ($16.70 per month).
Video: Will Cuba’s Economy
Change?
Government Controls
• EXAMPLE: Socialism and Communism
▫ Karl Marx influenced some societies to adopt
command economies
 Socialism—government owns some of the factors
of production
 Communism—no private property; little political
freedom
▫ Authoritarian system requires total obedience to
government
 communism is authoritarian socialism
Government Controls
• Socialism & Communism
▫ Democratic socialism established
under democratic political process
 government owns basic
industries
 other industries private
 central planners make decisions
for government-owned
industries
 central planners might control
other sectors, such as health
care
Command Economies Today
No pure command
economies today
 modern
telecommunications
bringing about
change
▫ Some economies
still have mostly
command elements
Command Economies Today
• North Korea
▫ Communist North Korea used
resources for military, not
necessities
 built large army; nuclear
weapons program
 In 1990s and early 2000s,
millions died of hunger,
malnutrition
 In 1990s, production
decreased and economy
shrank
 Since 2003, some market
activity allowed
Command Economies Today
• Impact of Command Economies
▫ In theory, command systems fair to everyone; In
practice, many disadvantages
 central planners do not understand local conditions
 workers have little motivation to be productive or
conserve resources
 artificially low prices lead to shortages
 people sacrificed to carry out centrally planned
policies
Types of Economic Systems cont.
• Market / Free Enterprise
Economy (USA)
▫ Based on independent
decisions by businesses &
consumers with limited
government regulation.
 consumers spend money, go
into business, sell their labor
as they wish
 producers decide how to use
their resources to make the
most money
▫ Consumers, producers
benefit each other when they
act in self-interest
Features of our Economic System
1. Private Enterprise
2. Private Property
3. Profit
4. Competition
5. Freedom of Choice
Fundamentals of a Market Economy
• 1: Private Property and Markets
• 2:Limited Government Involvement
▫ Laissez faire—government should not interfere
in economy
▫ Capitalism—system having private ownership of
factors of production
 says producers will create products consumers
demand
 no one tells consumers what to buy
▫ Actual market economies all have some
government involvement
Fundamentals of a Market Economy
• 3: Voluntary Exchange in Markets
▫ Voluntary exchange—traders believe they get
more than they give up
▫ Marketplace – any place where G&S (or $$)
are exchanged
• 4: Competition and Consumer Sovereignty
▫ Consumer sovereignty—buyers choose products,
control what is produced
▫ Competition controls self-interested behavior
 sellers offer low price or high value to please
consumers, make profit
Fundamentals of a Market Economy
• 5: Specialization and Markets
▫ Specialization—people concentrate
their efforts in the activities they do best
 encourages efficient use of resources
 leads to higher-quality, lower-priced
products
Economic Systems
Characteristics of Free Enterprise:
 Laws encourage competition - the rivalry between 2 or more
businesses for customer dollars.
Price competition – focuses on the selling price of a product or
service.
Non-price competition - focuses on factors that are not related
to what the product sells for. Yankees have highest ticket price
so their focus must be on something other than price.
 Competition encourages businesses to develop new products and
services.
 Antitrust laws make monopolies illegal – when one business
controls the entire market for a good or service.
 The profit motive encourages businesses to efficiently provide
products, at a profit, that consumers need & want.
 Consumers cast their “economic vote” when they decide what to
purchase.
Why are glasses so expensive?
1. Where is the global
headquarters of Luxottica?
2. Name the eye wear retailers
owned by Luxottica.
3. Do you feel that Luxottica has
control over the prices
consumers pay for glasses?
4. If monopolies are illegal in the
United States does this mean
that Luxottica is NOT a
monopoly?
Video: Is Luxottica a
Monopoly?
Impact of Market Economies
• Advantages
▫ Individuals free to make economic choices, pursue
own work interests
▫ Less government control means political freedom
▫ Locally made decisions mean better use of
resources, productivity
▫ Profit motive ensures resources used efficiently,
rewards hard work
 resulting competition leads to higher-quality, more
diverse products
Impact of Market Economies
• Disadvantages
▫ Pure market economy has no way to provide
public goods and services
▫ Does not give security to sick or aged
▫ During U.S. industrial boom, business owners
rich, workers low pay
▫ Businesses did not address problems caused by
industrialization
▫ Industrialized societies adopt some government
control of economy
Today’s Mixed Economies
• Mixed economy
▫ has elements of traditional, command, market
systems
 most common type of economic system
▫ Traditional, command, market economies adopt
elements from others
Today’s Mixed Economies
• Life in a Mixed Economy
▫ Family farming in U.S. serves as
example of mixed economy
 traditional: all members of
family help bring in harvest
 command: affected by
government—public school,
roads, Social Security
 market: own land, sell their
products in competitive
market
Today’s Mixed Economies
• Types of Mixed Economies
▫ U.S. basically has market system
▫ European countries greater mix of market and
command elements
 France—government controls some industries;
provides social services
 Sweden—state owns part of all companies; lifelong
benefits, high taxes
 Namibia—traditional; state supports market, foreign
investment
Trends in Modern Economies
• Changes in Ownership
▫ Nationalize is to
change from private
to government
ownership
▫ Privatize is to change
from government to
private ownership
Mixed Economies
• Most democratic countries fall in this category
(there are no truly pure Market or Command
economies).
▫ Examples: Brazil, Mexico, Canada, UK, US,
Germany, Russia, Australia, etc.
Economy Continuum
Command
Cuba
Market
Russia
Germany
UK US
Australia
Now it’s time to……….
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