A Brief Overview of Economic
Systems
Economic Systems
Traditional Economy
Command Economy
Market Economy
( also Mixed Economy)
People in all economies must answer three basic questions:
1. What goods and services will be produced?
No society can produce everything its people want. Why?
Should US Steel produce more car parts? Plane parts? Beams for
buildings? Rails for roads?
What do consumers need more of – Books? Video games? Diapers?
2. How will these goods and services be produced?
Through the combination of land, labor, capital but how?? Small
businesses? Mass production? By hand? Should we use land for farms or
factories? Should more people be taught to be lawyers or firemen?
3. Who will consume them?
Who gets what? Who deserves what? Fairness/equity? Ability to pay?
First come, first served? According to need?
People in all economies must answer three basic questions:
National economies vary in the extent to which they
rely on government directives (central planning) and
signals from private markets to allocate scarce
goods, services, and productive resources.
Traditional Economies
People often perform the same type of work as their
grandparents and parents regardless of their abilities or
their potential
In Traditional Economies, economic decisions are
based on customs and history
The goal of a traditional economy is stability
and security.
Farming, hunting and gathering are done the same way
as the generations before with little technological
advancements.
Goods and services are distributed through a
hierarchical system - the tribe, family, or other social
structure.
People know their role in life, but there are
little opportunities to change.
Command Economy
In a Command Economy, the government or
other central authority makes decisions and
determines how resources will be used.
There is no competition between businesses because
the government sets the prices of goods and services.
Businesses are not run to create a profit and shortages are
common. The consumer has limited choices in the market
place
Less selection on the
store shelves
Bread line
Command Economy
The government dictates the job
in which you work.
The goal of Command economies is equity and
security…
…goods and services are distributed more evenly
and everyone gets at least some healthcare, housing
and food
(Free) Market Economy
In a free market economy there is little or no
government involvement. Profit and consumer
sovereignty are the motive for economic
decisions.
Competition creates great individual choice and
lots of options for goods and services.
.
The main goals of a market
economy are economic freedom,
efficiency, and profit.
If an entrepreneur can find someone
willing to buy it, they will sell it.
Yes,
squeeze
bacon
“Consumer sovereignty” means the consumer decides
what will sell on the market …or what won’t sell!
There is mostly private
ownership of property and
producers choose the most
profitable method of
production
There is competition
among businesses which
helps determine price and
increases the quality of the
products.
Goods and services
are consumed by
those who are
willing and able to
pay the market
price.
There is lots of individual choice and freedom with
opportunities to be successful.
But…
buyer beware!
(caveat emptor)
In a pure free market economy
there is little
consumer protection !
Mixed Economies
In Mixed Economies government and individuals share in the
ownership of resources and the decision making process.
Individuals and businesses own the means of
production and private property.
Government is owner and decision
maker for the public sector.
(roads, courts, schools…)
Individuals and businesses are owners and
decision makers for the private sector.
(houses, shops, factories…)
The main goals of a mixed economy ar much like
a market economy - economic stability,
economic freedom – but the government is also
involved to provide public goods and for
consumer protection
While the government makes decisions for the public sector
Businesses have the freedom to get creative with their building designs
In Mixed Economies individuals and businesses
make decisions for the private sector…
Most economies today
(including the U.S.)
are mixed economies