Unit 7: Foundations of
Economics:
Types of Economic Systems
Types of Economic Systems
Main Idea:
Introduction to Types
of Economic Systems
Notes:
• The way a nation determines
how to use its resources to
satisfy its people’s needs and
wants is called an economic
system.
• Economists have identified 4
types of economic systems.
1.
2.
3.
4.
Traditional System
Command System
Market System
Mixed System
Types of Economic Systems
Main Idea:
Traditional System
Notes:
• In a traditional economy,
the 3 economic questions
are answered according to
tradition.
• Economic decisions are
based on customs and
beliefs that have been
handed down by
generation.
Types of Economic Systems
Main Idea:
Traditional System
(cont’d.)
Notes:
• Parents teach children to
perform the same tasks
that they learned from
their parents.
• Examples: Inuit of North
America, The Mbuti of the
Democratic Republic of
the Congo, and the
Aborigines of Australia.
Types of Economic Systems
Main Idea:
Traditional System
(cont’d.)
Notes:
• Advantages: (1) You know
what is expected of you. (2)
Family and community ties
are usually very strong.
• Disadvantages: (1) Change
is discouraged, making
production inefficient. (2)
Choice among consumer
goods is rare. (3)
Accumulating wealth is not
likely.
Types of Economic Systems
Main Idea:
Command System
Notes:
• In a command economy
government leaders
control the factors of
production and make all
decisions about their use.
• Through regulations about
education the government
guides people into certain
jobs, which dictates what
individuals earn.
Types of Economic Systems
Main Idea:
Command System
(cont’d.)
Notes:
• Examples: North Korea
and parts of the People’s
Republic of China.
• Advantages: (1) Little
uncertainty of
employment.
• Disadvantages: (1) Lack
of incentives to work hard.
(2) Lack of consumer
choices. (3) Government
sets workers salaries.
Types of Economic Systems
Main Idea:
Market Economy
Notes:
• In a market economy, also
called capitalism,
individuals own the factors
of production and make
economic decisions
through free interaction
(free market) while looking
out for their own and their
families best interests.
Types of Economic Systems
Main Idea:
Market Economy
(cont’d.)
Notes:
• Prices in a market
coordinate the interaction
between buyers and
sellers.
• The freedom of prices to
rise and fall results in a
neutral, self-organizing,
incentive-driven system.
Types of Economic Systems
Main Idea:
Market Economy
(cont’d.)
Notes:
• Economists use a model
called a circular flow of
income and output to
illustrate how a market
system works.
• The factors of production
flow from individuals to
businesses, who use those
factors to produce
goods/services that flow
back to individuals.
Types of Economic Systems
Main Idea:
Market Economy
(cont’d.)
Notes:
• Advantages: (1) People have freedom
to choose a career, spend income, own
property and take risks to earn profits.
(2) Competition provides consumers
with a wide variety of goods and
services to choose from, as well as an
efficient way of determining costs.
• Disadvantages: (1) Because the pure
market system is so driven by the
individual looking out for their own
interests, many fear that those too old,
young, or sick to work will not survive
unless churches, families or
organizations step in to provide goods
and services for them.
Types of Economic Systems
Main Idea:
Mixed Economy
Notes:
• A mixed economy combines
basic elements of a market
economy and a command
economy. Most countries
have a mixed economy
where private ownership of
property and individual
decision making are
combined with government
intervention and
regulations
Types of Economic Systems
Main Idea:
Mixed Economy
Notes:
• Examples: United States
• Advantages: (1) Wide range
of choice on the part of the
individual. (2) Regulations in
place to protect environment,
provide safety guidelines for
workers, and laws to protect
consumers.
• Disadvantages: (1)
Potential for profits might not
be as great as in a pure
market system.