Economic Systems
The Big Ideas!
 Economic systems are different ways that people use
resources to make and exchange goods and services.
 Literacy rate, life expectancy, and Gross Domestic Product
measure economic development.
 Some countries have a wide mix of economic activities, while
others may have only one or two main economic activities.
 Countries of the world are grouped based on their level of
economic development.
 Divided into 2 categories
 Developing nations
 Developed nations.
Economic Systems
 An economic system describes how a
country’s economy is organized
 Because of the problem of scarcity, every
country needs a system to determine how to
use its productive resources
 An economic system must answer 3
basic questions…but first, a vocabulary
break.
Vocabulary Break
 Economic System: The system of
production, distribution, and consumption
of goods and services
 Scarcity: The limited supply or
availability of a resource
3 Questions
for Economic Systems
 WHAT TO PRODUCE? (What kinds of goods and
services should be produced?)
 HOW TO PRODUCE? (What productive resources
are used to produce goods and services?)
 FOR WHOM TO PRODUCE? (Who gets to have
the goods and services?)
 The way a society answers these questions
determines its economic system.
The 3 Basic Questions
Four Types of Economic
Systems:
 1. Traditional Economy
 2. Command Economy
 3. Market Economy
 4. Mixed Economy (Market + Command)
Traditional Economy
 The oldest economic system in the world;
not used much today
 A system in which people grow their own
food and make their own goods
 An economic system in which economic
decisions are based on customs and beliefs
 People will make what they always made & will do
the same work their parents did
 Exchange of goods is done through
Bartering: trading without using money
 Found in rural and remote communities
Traditional Economy
 Who decides what to produce?
 People follow their customs and make what
their ancestors made
 Who decides how to produce goods &
services?
 People grow & make things the same way
that their ancestors did
 Who are the goods & services
produced for?
 People in the village who need them
Traditional Economy
 Examples:
 Villages in Africa and South America; the
Inuit tribes in Canada; Used recently in
Argentina during difficult economic times
Command System
 The government owns most of the resources and businesses
that produce goods and services & owns most of the property
 The government decides what to produce, how much to produce, and
what the prices will be
 Governments also determines the wages of workers
 Also called a planned economy
 This system has not been very successful & more and more
countries are abandoning it
Command Economy
 Who decides what to produce?
 Government makes all economic decisions
 Who decides how to produce goods
and services?
 Government decides how to make
goods/services
 Who are the goods and services
produced for?
 Whoever the government decides to give
them to
Command System
 Countries with communist governments have
Command economies
 Found in North Korea and Cuba; the
communist governments of these nations own
and control most businesses
 *Germany and Russia have moved away from
having a Command economy since 1991. Now
they have a Mixed economy.
Market Economy
 An economic system in which economic decisions are guided by
the changes in prices that occur as individual buyers and sellers
interact in the market place
 A system based on private ownership, free trade, and competition
 Most of the resources are owned by private citizens
 Sometimes called capitalism or a demand economy
 Economic decisions are based on Free Enterprise (competition
between companies)
 Important economic questions are not answered by government but
by individuals
 Government does not tell a business what goods to produce or what
price to charge
 Individuals and businesses are free to buy and sell what they wish
 Prices are determined by the supply and demand for goods
 The most common economic system used in the world today
Market Economy
 Who decides what to produce?
 Businesses base decisions on supply and
demand and free enterprise (PRICE)
 Who decides how to produce goods
and services?
 Businesses decide how to produce goods
 Who are the goods and services
produced for?
 consumers
Market Economy
 There are no truly pure Market
economies, but the United States is
close.
Mixed Economy
 Market + Command = Mixed
 There are no pure command or market
economies. To some degree, all modern
economies exhibit characteristics of both
systems and are often referred to as mixed
economies.
 Most economies are closer to one type of
economic system than another
 Businesses own most resources and
determine what and how to produce, but the
Government regulates certain industries
Mixed Economy
 Who decides what to produce?
 businesses
 Who decides how to produce goods and
services?
 Businesses, but the government regulates
certain industries
 Who are the goods and services
produced for?
 consumers
Mixed Economy
 Most democratic countries fall in this
category (there are no truly pure Market or
Command economies).
 A combination of command and market
economies which provides goods and
services
 The government may own some industries,
while others belong to private owners
 Examples: Brazil, Mexico, Canada, UK, etc.
Which Economic System Is
Best?
 Let’s do some research and find out!