TOPIC 2 ECONOMIC SYSTEMS
ECONOMIES BASED ON TRADITION
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In a traditional economy, resource use and social behavior are dictated by ritual, habit,
or custom.
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Examples of traditional economies include the central African Mbuti, the Australian
Aborigines, and the Inuit of Northern Canada.
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The main advantage of a traditional economy is that the answers to WHAT, HOW, and
FOR WHOM to produce are determined by customs and tradition.
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The main disadvantage of a traditional economy is that it tends to discourage new ideas
and new ways of doing things.
ECONOMIES BASED ON COMMAND
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In a command economy, a central authority makes the major decisions about WHAT,
HOW, and FOR WHOM to produce.
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Socialism is a modern, somewhat more liberal version of a command economy.
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The main advantages of a command economy are that it can change direction quickly,
and it allows many citizens to receive goods and services they otherwise could not afford.
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Disadvantages include the loss of individual freedom to choose, the production of lowquality goods, a large decision making bureaucracy, and lack of individual initiative.
ECONOMIES BASED ON MARKETS
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A market economy is based on capitalism.
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Supply, demand, and the price system help people make decisions and allocate
resources.
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People can spend money on what they want and can own resources privately.
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Advantages of a market economy include a high degree of individual freedom and
customer satisfaction, a variety of goods and services, the incentive to take care of
private property, and decentralized decision making.
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Disadvantages include not providing for basic needs of everyone, a shortage of some
services, and a high degree of uncertainty.
CHARACTERISTICS OF FREE ENTERPRISE
CAPITALISM
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A free enterprise economy has both capitalism and free markets.
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Characteristics of a capitalistic free enterprise economy include economic freedom,
voluntary exchange, private property rights, the profit motive, and competition.
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Economic freedom allows you to choose your occupation, employer, and job location.
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Capitalism allows voluntary exchange between buyers and sellers.
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Private property rights allow people to own and control possessions, which gives them the
incentive to work, save, and invest.
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The profit motive is largely responsible for the growth of a free enterprise system.
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Competition benefits both consumers and the economy.
DISADVANTAGES OF FREE ENTERPRISE
CAPITALISM
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Periods of uneven economic growth are one of the disadvantages of free enterprise
capitalism.
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In free enterprise capitalism, the gaps between rich and poor citizens seem to increase.
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In free enterprise economies, suppliers tend to combine to avoid competition, which
results in fewer participants on the supply side of the market.
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Businesses such as corporations have most of the same rights as individuals, but they
also have many responsibilities as a result of government-imposed regulations.
BENEFITS OF FREE ENTERPRISE CAPITALISM
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Individual freedom is closely related to economic freedom.
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Market economies produce a huge variety of goods.
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Market economies adjust daily, mainly through the ever-changing prices of goods and
services.
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Intense competition in a free market capitalist economy promotes economic progress in
the form of a continuing supply of newer and better products.
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When more and better products are produced in a free market capitalistic system, wealth
is created.
PROBLEMS OF TRANSITION
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The transition of communist and socialist economic systems to capitalism has been the
dominant economic trend of our lifetime.
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Privatization is necessary for the conversion of state-owned property to private
ownership.
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The ruling party in a communist or socialist economy fears the loss of political power
during a transition to capitalism.
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Citizens have to learn to make their own decisions, take initiative, interpret prices, and
fend for themselves in free markets.
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Many countries underestimate the costs of converting to capitalism.
COUNTRIES AND REGIONS IN TRANSITION
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In Russia, the decades-long transition to capitalism has resulted in the current marketbased economy, with the exception of government-controlled energy, natural resource,
and defense-related industries.
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After the failure of the Great Leap Forward, China was influenced by successful market
economies in Asia and today is undergoing some privatization and other capitalistic
endeavors.
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In Latin America, socialism still exists in Venezuela and Argentina, but Chile has made
the transition to capitalism.
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After the Soviet Union collapsed, many Eastern European countries transitioned to
capitalism, including Poland, Hungary, the Czech Republic, and Slovakia.
OTHER FACES OF CAPITALISM
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Compared to the U.S. government, the Japanese government is much more involved in
the day-to-day activities of the private sector.
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By opening its markets to world trade, South Korea has progressed from one of the
poorest countries in Asia in the mid-1950s to a leading producer of electronics and
automobiles today.
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The government in Singapore has focused on a few select industries, pouring money
and resources into pharmaceuticals, medical technology, and financial and high -tech
industries.
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Taiwan has always depended on economic planning and was one of the early economic
powers in Asia, but its centralized planning may hamper future economic growth.