Economic Systems
Economies Based on Tradition
• Characteristics
• Traditional Economy – Use of scarce resources, and almost
all other economic activity, is based on ritual, habit, and
custom.
• Habit & custom also dictate social behavior
• Roles defined by customs of elders & ancestors, not
individual choice
Economies Based on Tradition
• Advantages
• Everyone knows what role to play
• Little uncertainty…
• Over WHAT to produce
• Over HOW to produce
• Over FOR WHOM to produce
Economies Based on Tradition
• Disadvantages
• Discourages new ideas & ways of doing things
• Punishes people who act different
• Lack of progress results in economic stagnation &
lower standard of living
Economies Based on Command
• Command Economy – Central authority makes major
decisions about WHAT, HOW, & FOR WHOM to
produce.
• Potential Leaders – King, Dictator, President, Tribal
Leader, etc.
• Socialism – Economic & political system in which the
government owns some, but not all, factors of production.
Government decides WHAT, HOW, & FOR WHOM.
Economies Based on Command
• Characteristics
• Central governing authority makes all major economic
decisions
• Severely limited private property
• Socialist economies very similar, fewer government
owned resources
• Objective of Socialist government – Serve needs of
people
• BOTH – Decisions made for the people, NOT by the
people
Economies Based on Command
• Advantages
• Can change direction drastically
• Allows citizens to receive goods & services they
couldn’t normally afford
Economies Based on Command
• Disadvantages
• Leaders provide for themselves at expense of people
• No individual freedom to choose
• Radio & TV limited to government approved
propaganda
• Lack of quality goods
• Lots of bureaucracy
• No individual incentives
• Lack of flexibility
• Small economies
Economies Based on Markets
• Market Economy – Economic system in which supply,
demand, & price help people make decisions & allocate
resources.
• People make decisions based on own best interest
Economies Based on Markets
• Characteristics
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Lots of freedom
Buyers help producers decide WHAT to produce
Businesses decide HOW to produce
FOR WHOM decided by income and spending
Private ownership of resources
Economies Based on Markets
• Advantages
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High degree of individual freedom
Adjusts gradually to change over time
Relatively small degree of government interference
Decision-making decentralized
Large variety of goods & services
High degree of consumer satisfaction
Goods privately owned
Economies Based on Markets
• Disadvantages
• Does not provide for everyone
• May not provide enough of some basic goods &
services
• High degree of uncertainty