1
Objectives
List the three basic economic questions.
List the three types of economic systems.
Explain who answers the economic
questions in each type of economy.
Describe the three major features of a
market economy.
Explain why most economies are mixed.
2
Marketing Terms
traditional economy
command economy
centrally planned
economy
market economy
consumer economy
capitalism
capitalist economy
free enterprise
private enterprise
free market
economy
mixed economy
transition economy
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The Three Questions
The problem of scarcity leads to the
three economic questions
What should we produce?
 How should we produce it?
 Who should get the products?

#1 Who answers these questions
for the U.S. economy?
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What Should We
Produce?
or
Corn
Cattle
5
How Should We
Produce It?
or
Paper and Pencil
Computer
6
Who Should Get the
Products?
or
Queen
Commoners
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Types of
Economic Systems
Economic systems are classified

based on who answers the three
questions
Types of economic systems
traditional
 command
 market

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Traditional Economy
In a traditional
economy

elders answer
the economic
questions
– based on
traditions
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Traditional Economy
Traditional economies developed

early in human history
Following tradition is seen as a way of

keeping the society safe and healthy
There is pressure on traditional
economies to become modern.
Very few traditional economies exist.
#2. What is tradition?
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Command Economy
In a command economy

the national government makes all the
economic decisions
Main features
government ownership of land and capital
 government control of labor
 government control of all economic activity

#3. How could government control of the
economy affect your life?
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Command Economy
A command economy is also called a
centrally planned economy
because the national government is also called
the central government, and
 the central government plans
– all aspects of the economy

Ideally, in a command economy

everyone shares equally in the limited
resources
Socialist Economy
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Market Economy
In a market economy

individuals answer the economic
questions
Market economies developed with a
political philosophy called democracy
democracy emphasizes individual rights
 market economies emphasize individual
choice

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Market Economy
A market economy is also called a
consumer economy

because consumers have a great impact
on this economy
Three features of a market economy
private property
 economic freedom
 market forces

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Private Property
Private property

individuals have
the right to buy
and own
– land
– capital goods
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Private Property
Capitalism and
capitalist economy
are two more terms
for a market economy

because individuals
can own capital
How is this different from a
command economy?
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Economic Freedom
Economic freedom

individuals are free
– to make their own
economic
decisions
– to start any legal
business
– to decide what
career to choose
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Economic Freedom
A market economy is also called

free enterprise and private enterprise
because
– enterprise is another term for business
– people are free to start enterprises
– private individuals (as opposed to the
government) can start enterprises
#4 How is this different from a
command economy?
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Market Forces
Market forces control a market
economy.
Free market economy is another term
for market economy

because market forces are “free” to
influence the economy
#5. How is this different from a
command economy?
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Command and Market Economies
Features
Command
Market
Political philosophy Communism
Socialism
Democracy
Who answers the
three economic
questions?
Who controls the
economy?
Who owns the
economic inputs?
Central
government
Individuals
Central
government
Central
government
Market forces
Individuals
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Command and Market Economies
Features Command
Main
features
Government
ownership of land
and capital
Government
control of labor
Government
control of all
economic activity
Market
Private property
Economic
freedom
Market forces:
supply and
demand, profit
motive, and
competition
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Command and Market Economies
Features Command
Other
names
Centrally planned
economy
Communist
economy
Socialist
economy
Welfare state
Market
Capitalism
Capitalist
economy
Consumer
economy
Free enterprise
Free market
economy
Private enterprise
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Mixed Economies
Most modern economies are mixed.
Why?
both market and command economies have
flaws
 market economies are unstable
 command economies are too complicated to
successfully plan and control

For these reasons, there are no pure
command or pure market economies
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Mixed Economies
In a mixed economy

both the government and individuals
– are involved in making economic
decisions
Four types of mixed economies
mixed command economy
 transition economy
 mixed socialist economy
 mixed market economy

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Mixed Command
Economy
Mixed command economy

command economy with some market
elements
During much of the 20th century, China
was a communist country with a pure
command economy

but the Chinese economy had difficulty
meeting the needs of its people
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China had over 1.3 billion people in
2006, more than any other country
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Mixed Command
Economy
In 1978, the Chinese government

started reforms to bring aspects of a
market economy to China
– less government involvement in
farming and industry
– individuals allowed to start and run
small businesses
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Transition Economy
Transition economy

changing from command to market
The Soviet Union was one of the great
command economies of the 20th century
its economy had trouble providing for the
needs of its citizens
 economic and other problems caused the
Soviet Union to break up in 1991
 it became 15 independent countries

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Many of the newly independent
countries have transition economies
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Mixed Socialist
Economy
Mixed socialist economy
democratic political system
 economy that combines market and
command elements

France, Sweden, and other countries
with a mixed socialist economy are
called

social democracies
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Mixed Socialist
Economy
Market/Democratic elements
citizens vote and have many rights
 citizens can start and run businesses

Command/Socialist elements
government collects a large percent of
income as taxes, to use to ensure a
decent standard of living for everyone
 government owns and operates major
industries

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Mixed Market
Economy
A mixed market economy is a market
economy with some command elements
The United States is a mixed market
economy because government
helps people in need through social security
and welfare benefits
 regulates business
 collects income taxes, but not as much as in
a social democracy

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A Continuum
Continuum
a graph that shows two opposite qualities
– that blend in proportion from one end
to the other
 a good way to look at modern economies

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A Continuum
A continuum of economic systems has
a pure command economy at the left
– total government control
 a pure market economy at the right
– individual and market forces totally in
control

A country’s position on the continuum
depends on the amount of government
or individual control
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Continuum of Economic Systems
Pure
Command
Pure
Market
Cuba China
France
Sweden
United States
Legend
Amount of governmental control
Amount of individual control
Where on the continuum do
the following countries belong?
Cuba, China, France, Sweden, United States35
Review
What are the three economic
questions?
What are the three types of
economies?
What are three features of a market
economy?
How is a command economy different
from a market economy?
Why are most economies mixed?
36
Glossary
Back
capitalism. Another term for market
economy.
capitalist economy. Another term for
market economy.
centrally planned economy. Economy in
which the national government makes
all the economic decisions; also called
command economy.
37
Glossary
Back
command economy. Economy in which
the national government makes all the
economic decisions; also called
centrally planned economy.
consumer economy. Another term for
market economy because consumers
have a great influence on this type of
economy through what they buy and
how much they buy.
38
Glossary
Back
free enterprise. Another term for market
economy.
free market economy. Another term for
market economy.
39
Glossary
Back
market economy. Economy in which
individuals answer the economic
questions and market forces are
allowed to operate; also called
capitalism, capitalist economy,
consumer economy, free enterprise,
free market economy, and private
enterprise.
40
Glossary
Back
mixed economy. Economy in which
both the government and individuals
are involved in making economic
decisions.
private enterprise. Another term for
market economy.
41
Glossary
Back
traditional economy. Economy in which
the economic questions are answered
by the elders based on the society’s
traditions.
transition economy. Economy that is
changing from command to a more
market economy.
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