Economic Systems and
Decision Making
Chapter Two
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Essential Question
How does an economic
system help a society deal
with the fundamental
problem of scarcity?
2
Guiding Question
How does a traditional economy
answer the basic questions of
WHAT, HOW, and FOR WHOM
to produce?
3
Economic Systems
 What would your business have to do conduct
business in a foreign country?
 Take a few minutes to discuss and share
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Economic Systems
 What is an Economic System?
 All societies have them.
 An organized way of providing for the wants and needs
of the people.
 Four kinds:
 Traditional
 Command
 Market
 Mixed
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Command
-Central authority makes the
major decisions about what,
how, and for whom to
produce.
-Headed by any leader
-Gov’t makes all econ.
Decisions – what to make
-Cannot own homes, limited
freedoms,. .
Traditional
-All economic activity stems
from ritual, habit, or custom.
-Roles are defined by customs
of elders and ancestors.
-All know their place.
Market
-People make decisions in their
own best interest.
-Great deal of freedom.
-Based on capitalism.
-Businesses are free to find the
best production methods.
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Mixed
-When all three types are
combined.
-Socialism – mixed economic
and political system.
-Communism –
political/economic system
where all property is
collectively owned.
Economic System
Advantages
Traditional Economy
Command Economy
Market Economy
Mixed Economy
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Disadvantages
Economic System
Advantages
Traditional Economy
-All know your role
i.e. hunter, gatherer,
farmer, etc.
-Know who you are
producing for
-Discourages new
ideas/ways of doing things
-Economic stagnation – no
progress, lower standard
of living
Command Economy
-Can change direction
drastically
-Low cost health and
human services – trade
off?
-Ignore basic wants and
needs of consumers
-just filling quotas vs.
quality product
-requires a large decision
bureaucracy
Market Economy
-Individual freedom
-Adjusts to change
-Little gov’t interference
-Decision making left up to
the individual
-Variety of goods and
services/satisfaction
-Does not provide for
everyone
-May not provide enough
of the basic services
-High degree of
uncertainty among
employees.
Mixed Economy
-Doesn’t leave anyone out
-Higher costs, services
limited, low quality
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Disadvantages
The Global Transition to
Capitalism
Lesson 3
 Suppose you run a company that makes
and sells smart phones. If the stores in
which your phones are sold cannot stock
enough phones to meet customer
demand, what would you do? Would you
produce more phones or fewer phones?
Would you change the price of your
phones? Explain your decisions.
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The Global Transition to
Capitalism
 What is capitalism?
 An economic system where private citizens
own and use the factors of production
 draws attention to the private ownership
of resources
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The Global Transition to
Capitalism
 Guiding Question
 In what ways does the mind-set of a
country’s citizens have to change in order
to transition to capitalism?
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The Global Transition to
Capitalism
 Most communist and socialist economies
have been transitioning to capitalism.
 capitalism is the most powerful engine for
generating wealth the world has ever seen.
 Can you think of an example of countries that
are in this transitional phase?
 China, Russia,
 This has allowed capitalism to have many
faces per say….each being slightly
different
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13
The Global Transition to
Capitalism
Turn and Talk
In your opinion, what has
caused most of the world
to embrace the concept
of capitalism?
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The Global Transition to
Capitalism
 Problems occurring when transitioning to
Capitalism
 4 main problems
 Privatization of State-Owned Property
 Loss of political power
 Responding to new incentives
 Understanding the costs
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The Global Transition to
Capitalism
 Privatization of State-Owned Property
 conversion of state-owned factories and
other property to private ownership, must
be accomplished.
 Rewards entrepreneurs
 because people take better care of
property they actually own
 Vouchers – Certificates that could be used
to purchase state owned property in
Poland, Hungary, and Czech Republic
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The Global Transition to
Capitalism
 Loss of Political Power
 When countries transitioned to capitalism,
the party feared that it would lose much of its
political power as a new class of
entrepreneurs and capitalists took over.
 Some communist leaders grabbed a large
share of the vouchers
 Traded political power for economic power
 Old ruling group became new ruling group
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The Global Transition to
Capitalism
 Responding to New Incentives
 The people had to learn to make decisions on
their own, take initiative, interpret prices, etc.
 workers used to getting the same salary
regardless of how hard or how often they
come to work have to learn that they will
get fired if they do a poor job
 Factory managers have to learn to pay back
loans they took out from banks, and they
have to learn to pay their bills on time.
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The Global Transition to
Capitalism
Turn and Talk
Many of you will have to transition
to the next stage in your life upon
high school graduation. Discuss the
transitions that will take place in
your life and also how you are going
to have to adjust to these changes.
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The Global Transition to
Capitalism
 Underestimating the Costs
 Too many countries that want the
advantages of capitalism focus on its
benefits, but they don’t fully consider its
costs. Yet the costs can hinder or even
prevent a country’s successful transition.
 unemployment, lost consumer income, tax
base, and GDP growth
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The Global Transition to
Capitalism
 Countries and Regions in Transition
 Russia, China
 Were both communist controlled countries
 Government had total control of their
economic systems – Command economies
 With that system, they could not keep up with
the capitalistic countries in terms of
production
 Have since transitioned to their own versions
of capitalism
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The Global Transition to
Capitalism
Turn and Talk
What do you think are the main
reasons that countries transitioned
from command economies to
capitalistic economies?
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