Economic Systems
The purpose of economics
Economics seeks to answer
the basic question of how
to deal with SCARCITY.
Law of Scarcity
 States that society has insufficient
productive resources to fulfill all human
wants and needs.
 Scarcity implies that not all of society's goals
can be pursued at the same time; trade-offs
are made of one good against others.
Economic Systems
 An economic system describes how a
country’s economy is organized
 Because of the problem of scarcity, every
country needs a system to determine how to use
its productive resources
 Scarcity = not having enough of something
 An economic system must answer 3
questions…
Economic Systems
1. WHAT TO PRODUCE? (What kinds of goods and
services should be produced?)
2. HOW TO PRODUCE? (What productive resources are
used to produce goods and services?)
3. FOR WHOM TO PRODUCE? (Who gets to have the
goods and services?
Three Types of Economic
Systems:
 1. Traditional Economy
 2. Command Economy
 3. Market Economy
 * Most countries are… Mixed Economies!
(Market + Command)
Distribution of Public/Private
Property
 Private property is the right of persons
and firms to obtain, own, control, employ,
dispose of, and bequeath land, capital, and
other forms of property.
 Public property refers to assets owned by
a state, community or government rather
than by individuals or a business entity.
Traditional Economy
 An economic system in which economic
decisions are based on customs and beliefs
 People will make what they always made &
will do the same work their parents did
 Exchange of goods is done through
Bartering: trading without using money
Traditional Economy
 Who decides what to produce?
 People follow their customs and make what
their ancestors made
 Who decides how to produce goods &
services?
 People grow & make things the same way that
their ancestors did
 Who are the goods & services produced
for?
 People in the village who need them
Traditional Economy
 Examples:
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Villages in Africa and South America
the Inuit tribes in Canada
the caste system in parts of rural India
the Aborigines in Australia
Command System
 Government makes all economic decisions &
owns most of the property
 Governmental planning groups determine such
things as the prices of goods/services & the wages
of workers
 This system has not been very successful & more
and more countries are abandoning it
Command Economy
 Who decides what to produce?
 Government makes all economic decisions
 Who decides how to produce goods
and services?
 Government decides how to make
goods/services
 Who are the goods and services
produced for?
 Whoever the government decides to give them
to
Command System
 Countries with communist governments have
Command economies
 Examples: There are no truly pure command
economic systems, but close countries are:
North Korea, former Soviet Union, Cuba
*Germany and Russia have moved away from
having a Command economy since 1991. Now they
have a Mixed economy.
Market Economy
 An economic system in which production
and distribution questions are answered by
prices and profits (supply and demand)
 Most of the resources are owned by private
citizens
 Economic decisions are based on Free
Enterprise (competition between
companies)
 Important economic questions are not answered
by gov. but by individuals
 Gov. does not tell a business what goods to
produce or what price to charge
Market Economy
 Who decides what to produce?
 Businesses base decisions on supply and demand
and free enterprise (PRICE)
 Who decides how to produce goods
and services?
 Businesses decide how to produce goods
 Who are the goods and services
produced for?
 consumers
Market Economy
 There are no truly pure Market economies,
but the United States is close.
 In a truly free market economy, the
government would not be involved at all
 There would be no laws to protect workers form
unfair bosses
 There would be no rules to make sure that
credit cards were properly protected
 Many societies have chosen to have some
rules to protect consumers, workers, and
businesses (MIXED)
 These rules reduce the freedoms that businesses
have, but they also protect the workers and
consumers
Mixed Economy
 Market + Command = Mixed
 There are no pure command or market
economies.
 To some degree, all modern economies exhibit
characteristics of both systems and are often
referred to as mixed economies.
 Most economies are closer to one type of economic
system than another
 Businesses own most resources and determine
what and how to produce, but the
government regulates certain industries
Mixed Economy
 Who decides what to produce?
 businesses
 Who decides how to produce goods and
services?
 Businesses, but the government regulates
certain industries
 Who are the goods and services produced
for?
 consumers
Mixed Economies
 Most democratic countries fall in this
category (there are no truly pure Market or
Command economies).
 Examples: Brazil, Mexico, Canada, UK, US,
Germany, Russia, Australia, etc.
Economy Continuum
Command
Cuba
Market
Russia
Germany
UK US
Australia
Which Economic System Is Best?
 Market system has proven to be best
because it promotes the goals of growth,
freedom, & efficiency
 Citizens are free to own their own property and
use it in the most efficient and profitable way
 Command and Traditional systems
sometimes offer more security, but are not
nearly as strong in efficiency, growth,
freedom, and environmental quality