Economic Systems
Who get to decide what gets produced?
How it gets produced?
And who gets to have it?
Economic Realities
• Wants > resources = scarcity
• Consequences of scarcity
– people must make choices
– goods and services must be rationed
All nations must answer
3 basic economic questions:
1. What goods and services should
be produced and in what quantity?
2. How should these products be
produced?
3. For whom should these products
be produced?
EOC study guide
Basic Economic
Concepts #4
1. What goods and services should be produced?
•
Should a local government use resources to build a new
school, repair an old highway, or construct a new recreation
center?
•
Should American producers use resources to make goods
for national defense or to provide services for retired
people who are too old or ill to work?
•
Should a farmer grow wheat, cotton, or lettuce?
2. How should these products be produced?
• How should we obtain crude oil to meet our energy
needs?
• How much pollution should we allow firms to
generate when producing goods?
• How should hogs be raised before they become food?
3. For whom should these products be produced?
• Who should receive the limited supply of flu
vaccinations?
• Who should benefit from the construction of a new
school?
• Who should a shoe manufacturer market their products
toward?
An economic system is a particular set of
social institutions which deals with the
production, distribution, and consumption of
goods and services in a particular society
3 Types of Economic Systems
Traditional
economy
An economic system that relies on
custom or tradition to
answer the 3 basic questions
EOC study guide
Basic Economic
Concepts #5
Traditional Economies
• Economic activity written by past generations
– Produce goods that satisfy basic survival needs
• produce little surplus
• engage in minimal trade
– Use primitive capital goods--no technology and
entrepreneurship
– Rigid division of labor
• uses gender, age, and skills to define status and role
in society
EOC study guide
Basic Economic
Concepts #5
Amish of Pennsylvania
• Past generations determined:
– the main crops are hay, wheat, barley, rye
and corn
– crops are harvested using horse-drawn plows
– society will voluntarily redistribute wealth to
members who are needy
Mbuti population of northern Zaire
• pygmy huntergatherers
• live in bands, ranging
from 15 to 60 people.
• Mbuti population totals
about 30,000 to
40,000 people
Kavango tribes of Namibia
• Kavangos make their
living from fishing, cattle,
and the farming of
sorghum, millet and
maize
• The chief has power over
his entire tribe and is
responsible for the
allocation of land.
• Although the Kavango
chiefs are always male,
the system is mostly
matrilineal
Types of Economic Systems Cont.
Traditional
economy
An economic system that relies on
custom or tradition to answer the
3 basic questions
An economic system in which the
Command
economy
government dictates
the answers to the basic economic
questions
EOC study guide
Basic Economic
Concepts #6
Command Economies
• The government or other central authority makes all
economic decisions
• Individuals have little, if any, influence over economic
functions
• Resources are owned by the government
• There is no competition; the purpose of business is to
provide goods and services, not to make a profit
• Factories are concerned with quotas
• Consumers have few, if any, choices in the market place
• The government sets the prices of goods and services
EOC study guide
Basic Economic
Concepts #6
Old Kingdom in Egypt
(2660 BC-2180 BC)
• Pharaoh undisputed central
authority
• Pharaoh owned all land and
collected taxes from peasants
who farmed it
• Peasants required to work on
public projects
–
–
–
–
Canals
Temples
Pyramids
Serve in the army
Soviet Union 1920s-1990s
• Communist Party dictated the use of
society’s resources
– Central planning authority sets production
levels for almost all products
– May redistribute income, usually from
society’s high earners to its low earners
– Government controls prices
North Korea
• One of the world's last centrally planned
systems
– market allocation is sharply limited – mainly in
the rural sector where some peasants sell
produce from small private plots.
– almost no small businesses.
Types of Economic Systems Cont.
Traditional
economy
Command
economy
An economic system that relies on
custom or tradition to answer the
3 basic questions
An economic system in which the
government dictates the
answers to the basic economic
EOC study guide
questions
Basic Economic
Concepts #7
Market
economy
A type of economy that relies on
the individuals and businesses to
answer the 3 basic questions and
manage the factors of production
Market Economies
• Economic decisions are made by individuals
competing to earn profits based on supply and
demand
• Resources are owned by individuals
• Profit, not quotas, is the motive for increasing work
• Competition determines price and increases the
quality of products
• Individual freedom is considered very important;
individuals have freedom to make economic
decisions
EOC study guide
Basic Economic
• Also called “capitalist” economy
Concepts #7
Hong Kong
• A free port that attracted foreign trade and
investment
• Offers free markets and profit incentives
with few government regulations on
business activities
• Hong Kong enjoys the most economic
freedom of any economy in the world
Mixed Economies
• Combines elements of pure market and command
economies
– Government and individuals share the economic decision
making process
• Government guides and regulates production of
goods and services
• Resources are owned by individuals
• Government serves to protect both producers and
consumers from unfair policies and practices
Mixed Economies
• Index based on Economic Freedom
Three Basic Economics Questions:
What to produce?
How to produce?
For whom to produce?