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
You get what you earn/ You reap what you
sew
The political system is a democracy with
leaders are elected by the people
A system where you are not penalized for
making a maximum profit
Socialism
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a completely classless society, where the
government controls all means of production and
distribution of goods.
Socialists believe this control is necessary to
eliminate competition among the people and put
everyone on a level playing field
The idea is that if everyone works, everyone will
reap the same benefits and prosper equally.
In socialism, the government want to redistribute
the wealth by taking from those that have earned
more money that others and giving it to those that
have earned less
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
United States of America
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Mixed Economy
Increased Social Programs
Government Getting more involved in
the market (bailing out big industries)
Increased taxes
Controlling retirement?
How this affects you