2.01 Economic
Systems
Objective 2.01 Compare different
types of economic systems:
traditional, free enterprise,
command and mixed.
What is Economics?

Economics studies how individuals and
societies seek to satisfy needs and
wants through incentives, choices, and
allocation of scarce resources.
Technology
Land
Oil & fuel
Doctors
Factors of Production

Economic Resources





Natural Resources – raw materials found in
nature that are used to produce goods
Human Resources – people’s knowledge, efforts,
and skills used in their work
Capital Resources – used to produce goods and
services (buildings, materials, and equipment)
Entrepreneurial Resources - recognize the need
for new goods or service
Scarcity – shortage of resources
Why Economic Systems?



Nations use economic systems to
determine how to use their limited
resources effectively.
Primary goal of an economic system is to
provide people with a minimum standard
of living, or quality of life.
Different types of Economic Systems
 Traditional
Economy
 Market Economy (free enterprise)
 Command Economy
 Mixed Economy
Traditional Economy

Found in rural, underdeveloped countries–






Vanuatu
Pygmies of Congo
Eskimos & Indian tribes
Belarus
Customs govern the
economic decisions
that are made
Farming, hunting and
gathering are done the
same way as the
generation before




Economic activities are
centered around the
family or ethnic unit
Men and women are
given different economic
roles and tasks
Advantages: people
have specific roles;
security in the way
things are done
Disadvantages:
Technology is not used;
difficult to improve
Market Economy (Free Enterprise)

Also called a Free Market

Economy or Free
Enterprise Economy


Businesses and
consumers decide what
they will produce and
purchase and in what
quantities
Decisions are made
according to law of
supply & demand



Supply and demand of
goods and services
determine what is
produced and the price
that will be charged.
Advantage—competition
to have the best products
and services
Disadvantage—huge rift
between wealthy and
poor
Note: a true market
economy does not exist.
Command Economy


The government (or
central authority)
determines what, how,
and for whom goods and
services are produced.
Two types:


Strong Command – where
government makes all
decisions (communism –
China, Cuba)
Moderate Command –
where some form of
private enterprise exists
but the state owns major
resources (socialism –
France and Sweden)

Advantages




Disadvantages




Guarantees equal
standard of living for
everyone
Less crime and poverty
Needs are provided for
through the government
Minimal choices
Fewer choices of items
No incentive to produce
better product or engage
in entrepreneurship
Also known as a Planned
or Managed Economy
Mixed Economy



Combination of a
market and a
command
economy
Government takes
of people’s needs
Marketplace takes
care of people’s
wants.



Most nations have a
mixed economy:
United States,
England, Australia
Advantage—balance
of needs and wants
met by government
and in marketplace
Disadvantage—
citizens have to pay
taxes
2.02 Supply and
Demand
02.00 Understand Economics and Economic Systems
02.02 Interpret supply and demand graphs
Marketplace



In a free market,
consumers determine
the demand of a
product.
Entrepreneurs see the
demand and make more
of the product.
More supply causes the
price to decrease as the
demand is fulfilled.
Supply Defined


How much of a good or service a
producer is willing and able to
produce at different prices.
Supply is produced by the
businesses in hopes of making
money.
Demand Defined



An individual’s need or desire for a good
or service at a given price.
Individuals are willing to consume more
of product or service at a lower price.
When the demand is high, competitors
see opportunity in the market.
Supply and Demand Graphs




People draw supply and demand graphs so
that they can easily see the relationship
between the supply and the demand.
A supply and demand graph is a visual
representation of supply and demand.
The graph shows changes in a product’s
demand or supply.
The graph can help predict the performance
of the product over time.
When Supply and Demand Meet



The point at which the supply and demand
curve meet is known as the equilibrium
price and quantity.
When the price is above the equilibrium
price, fewer people are willing to buy—the
price is too high.
When the price is below equilibrium price,
many people are willing to buy a lot of the
product—the price is too low. Suppliers
may not be able to make enough money
to cover costs.
Equilibrium Price (Market Price)
Supply
Curve
Equilibrium/
Market Price
Demand
Curve
Prices tell businesses what to
produce



The prices of goods and services dictate
what products are developed, made,
improved or modified.
When the price is high, demand falls and
businesses produce fewer goods.
When the price is low, demand rises and
businesses produce more goods to meet
the demand.
Competition is sparked
Sellers compete to make a profit
 If a person sees that they can meet a
need or a want, they enter the
marketplace


They compete with other businesses
already meeting the need or want.
OR

They make a new product and competition
follows when others enter the marketplace.
The Profit Motive
People and businesses enter the
marketplace in hopes of making a
profit (money).
 This “profit motive” encourages
people to enter the marketplace.
 This hope of making a profit is the
reward for people who take risks by
entering the marketplace.
