Basic Economic Questions & Economic Systems
In order to meet the needs of its people, every society must answer three basic economic questions:
 What should we produce?
 How should we produce it?
 For whom should we produce it?
A society (or country) might decide to produce candy or cars, computers or combat boots. The goods might be
produced by unskilled workers in privately owned factories or by technical experts in government-funded
laboratories. Once they are made, the goods might be given out for free to the poor or sold at high prices that only
the rich can afford. The possibilities are endless.
Although every society answers the three basic economic questions differently, in doing so, each confronts the
same fundamental problems: resource allocation and scarcity.
Resources are all of the ingredients needed for production, including physical materials (such as land, coal, or
timber), labor (workers), technology (not just computers but, in a broader sense, all the technical ability and
knowledge that is necessary to produce a given commodity), and capital (the machinery and tools of production).
Ec on omic S y st em s
Traditional Ec on om y
An econo my in which people do things the way they have always been done.
“If your father is a farmer, you are a farmer.”
The sa me methods of production are used.
Little or no change from year to year.
Methods based on habit, custo m, and religious belief.
Roles are narrowly defined.
Advantage
Everyone has a role in it.
Disadvantage
It discourages new ideas and ways of doing things.
Places you can find this type of econo mic system:
Societies in the rain forests of Latin America
Parts of Africa
Middle East
C ommand Econ om y
An econo mic system influenced by the co m mands, or directives, of a central authority consisting of one
person, or a small group who controls others in the society.
The me mbers of the society carry out the de mands.
Two types of co m mand econo my in the world today:
Strong & Moderate
Strong
Countries: North Korea and Cuba
Com mon ownership, the government owns and controls factories, equipment, and land.
The leaders of the country answer the three basic economic questions.
Political Structure is called Com m unism.
Advantages - in theory, the economy can make a dramatic change in a short time.
Disadvantages - consu mer goods and services are low on the list of priorities; very few of the
citizens’ wants are met .
Moderate
Government ownership of major industries like the railroads, steel industry and iron industry.
Provision of opportunities for private ownership.
Political structure is called Socialism.
Countries include: Sweden and France
Market Ec on om y
A system in which the basic economic decisions are based on the actions of buyers and sellers; the
market produces goods and services people are willing to buy and that will bring a profit to the sellers
and producers.
Countries: United States & Japan
Com monly referred to as capitalism.
Economic questions are answered by buyers & sellers.
Price plays an important role.
Regulation by government is minimal.
Advantages
It can adjust to change over time as consumer wants and needs change.
Freedo m for everyone to be involved.
Disadvantages
It rewards only citizens who are productive in the economy.
Wealth of economy is not evenly distributed.
“You need money to make money.”
Market economies ma y v ar y with a difference in the amount of go v ernment control.
Mixed Ec on om y
An econo mic system that is made up of parts of several other economic systems.
No country has an econo my based totally as any of the aforementioned.
Advantages
State provides the essential services
Private sector encouraged for profits
Competition keeps prices low
Consumer choice
Inefficient business behavior controlled
Disadvantages
Heavy taxes reduce incentives to work hard or make profits
Less efficient than private sector
Excessive control over business activity can add costs and discourage enterprise