\
Economic Systems
Objectives
You will demonstrate knowledge of basic
economic concepts and structures by
comparing the characteristics of:
- Market
- Command
- Traditional
Warm Up
• We’ve discussed the fact that the American
capitalist system is based on free market
principles.
• What countries can you list that have
different economic systems than ours?
• How would you describe these systems?
Factors of all Economic Systems
• A variety of methods can be used to allocate
goods & services.
• People acting individually or collectively through
government choose which methods to use to
allocate goods & services.
• People in all economies must answer three basic
questions:
• What goods and services will be produced?
• How will these goods and services be produced?
• Who will consume them?
Three Basic Economic Questions
1.What goods and services are to
be produced?
• Must ask this due to scarcity of
resources
• Don’t have enough to produce
everything
• Do you chose what people
need or what is profitable?
Three Basic Economic Questions
2. How are goods and services to
be produced?
• Large factories or mom and pop
shops?
• Corporate farms or family farms?
• Cooperatives?
Three Basic Economic Questions
3. Who will consume these goods
and services?
•
Who gets what is the toughest of the
questions.
•
How do you decide who gets it?
Base it on need? Base it on wealth? Base
it on first in line? Base it on equality or
fairness?
How/Who to decide who
is in need or what is fair?
Economic Systems Based on
Economic Goals
• 6 Possible Economic Goals
• Can choose to achieve one or more; not all 6.
• Economic Freedom – all people have full freedom
of what to make and buy or sell without
government interference
• Usually a goal, but tough to fully achieve
• People want protection from violators; government
expected to do this.
Other Economic Goals
• Economic Efficiency – economy strives not to
waste ANY of its resources
• Includes all natural and human resources
• Has a goal of FULL EMPLOYMENT – no waste.
• Economic Equality – strives to give all in society
an equal amount
• Problems arise with what is equal?
• Does everyone get a little?
• Do the rich or the poor receive more?
Other Economic Goals
• Economic Growth – strives to produce more and
better goods
• Via science, technology, innovation, entrepreneurship.
• Usually a goal of all economic systems
• Economic Security – strives to support those in
society who cannot provide for themselves
• Includes the young or old, sick or dying, etc…
• Economic Stability – strives to keep the economy
stable and running well
• Keeps things predictable; having goods, water, electricity,
jobs and prices relatively consistent
3 Basic
Economic Systems
• Traditional Economy
• Oldest system
• Based on the traditions
and customs of a group
of people – who hunts,
gathers, etc.
• Often found in small
clan societies
3 Basic Economic
Systems
• Command Economy
• Found in declining # of countries
• Decisions by the State
• Controlled economy/populace
• Similar economic system found in ancient civilizations
• Egyptian pharaohs commanded what to grow and what to do
with taxes, people, slaves, etc.
Capitalism, Socialism, &
Communism
• Born out of the Industrial Revolution
• People become rich off new machines; poor workers
working in terrible conditions
• Socialism - created to help the workers
• Idea that society owns all property – equality
• Spreads through USSR and other countries
• Communism – society owns all property and
wealth -- communal ownership
• Struggles due to use of a command economy
• Government tries to control production & distribution of
millions of products
• Unable to do so like free markets can; resources wasted
• No incentive to work harder so quality of products is
poor
3 Basic Economic
Systems
• Market Economy - AKA Capitalism, free market, free
enterprise
• decisions by individual consumers – no one tells
anyone what to make, all choices are made voluntarily
Characteristics of Market
Economies
1.Private ownership of resources - provides
incentives for owners of resources to weigh the
value of present uses against value of conserving
those resources for future use.
2.Competition among businesses - tends to lower
prices and raise quality.
3.Prices determined in marketplace through
interaction of supply & demand
Characteristics of Market
Economies (cont.)
4. Consumer Sovereignty - concept that consumers’
dollars “vote” -- tell businesses what to produce.
5. Profit Motive - incentive for businesses to
produce what consumers demand & to produce
those goods & services efficiently (keeping costs
down) in hopes of earning greater profit.
6. Limited government - acts as referee
•
•
Protecting consumers, workers, the environment
Competition in the marketplace.
U.S. Economic System
Mixed Economies
• The U.S. is primarily a market economy;
however, since it has elements of
government involvement (e.g., taxation &
regulation) it is sometimes called a mixed
economy.
 Hong Kong is the freest of the market economies in
the world…
• Most of the world’s economies today are
mixed economies and exist on a continuum
between market and command.
 Some lean toward market; others lean toward command.
Governments Role in
Economy
• Gov’t needed to set up institutions for markets
• Legal system, currency, labor laws, etc.
• Also limits sale of dangerous products– the case for regulation.
• Certain foods, drugs, cosmetics, etc.
• Gov’t also provides services that would not
usually be available due to price
• Public works – sewers, roads, highways, etc.
• Each country different in what they provide to society
• Role of government determines level of freedom
• Government impacts flow of goods & services
• Employs large # of workers in US; purchases largest # of goods
• Government collects taxes to purchase goods
• Pays wages to employees for services
• Pays for services like Soc. Sec.
• Referred to as “transfer payments” -- Transfers money from
one household to another
• Gov’t involvement places countries on the Mixed
Economy Continuum
• Explains the level of economic freedom of each country
A
Where are the people
in each cartoon?
Who or what decides
what consumers get in
Cartoon A? Cartoon B?
B
What advantages and
disadvantages do you see
represented in Cartoon A?
Cartoon B?
Which store would you
prefer to shop in, and
why?
Matrix of Economic Systems
What to produce?
Command
Traditional
Market
How to produce
For Whom to
produce
Goals
Country Examples
Matrix of Economic Systems
What to produce?
The
government/centra
l authority decides.
Command
Custom and
tradition dictate
Traditional
Market
Consumers decide
what will be
produced by
casting their
“dollar votes.”
How to produce
For Whom to
produce
Goals
Country
Examples
Matrix of Economic Systems
What to produce?
How to produce
The government/
central authority
decides.
The government/
central authority
decides.
Custom and
tradition dictate
Custom and
tradition dictate
Mainly
agricultural and
labor is divided
along gender lines
Consumers decide
what will be
produced by
casting their
“dollar votes.”
Producers choose
the most
profitable method
of production.
Command
Traditional
Market
For Whom to
produce
Goals
Country Examples
Matrix of Economic Systems
For Whom to
produce
The government/
central authority
decides.
What to produce?
How to produce
The government/
central authority
decides.
The government/
central authority
decides.
Custom and
tradition dictate
Custom and
Custom and
tradition dictate
tradition dictate
Mainly
agricultural and
labor is divided
along gender lines
Consumers decide
what will be
produced by
casting their
“dollar votes.”
Producers choose
the most
profitable method
of production.
Command
Traditional
Market
Goods and
services are
consumed by
those who are
willing and able
to pay the market
price.
Goals
Country Examples
Matrix of Economic Systems
For Whom to
produce
The government/
central authority
decides.
What to produce?
How to produce
Goals
The government/
central authority
decides.
The government/
central authority
decides.
Custom and
tradition dictate
Custom and
Custom and
tradition dictate
tradition dictate
Mainly agricultural
and labor is
divided along
gender lines
Economic
Stability and
Security
Consumers decide
what will be
produced by
casting their
“dollar votes.”
Producers choose
the most profitable
method of
production.
Economic
Freedom and
Efficiency
Economic
Equity and
Security
Command
Traditional
Market
Goods and
services are
consumed by
those who are
willing and able
to pay the market
price.
Country Examples
Matrix of Economic Systems
What to produce?
How to produce
The government/
central authority
decides.
The government/
central authority
decides.
Custom and
tradition dictate
Consumers decide
what will be
produced by
casting their
“dollar votes.”
For Whom to
produce
The government/
central authority
decides.
Goals
Country Examples
Economic Equity
and Security
China, Vietnam,
Cuba, North Korea
Custom and
Custom and
tradition dictate
tradition dictate
Mainly
agricultural and
labor is divided
along gender lines
Economic
Stability and
Security
Ethiopia, Somalia,
Afghanistan
Producers choose
the most
profitable method
of production.
Economic
Freedom and
Efficiency
United States*,
Canada, Australia,
Hong Kong,
Ireland
Command
Traditional
Market
Goods and
services are
consumed by
those who are
willing and able
to pay the market
price.
Directions: Label the following countries on the map. You may abbreviate. Then, pick a color to represent command
economies, market economies, and traditional economies. Create a key below the map and color in the countries you labeled
with the color that represents their economic system.
(Canada, United States, Hong Kong, Ireland, Australia, Ethiopia, Somalia, Afghanistan, China, Vietnam, North Korea, Cuba)
Canada
Ireland
US
China
Cuba
Afghanistan
North
Korea
Hong Kong
Vietnam
Ethiopia
Somalia
Australia
The Flow of Goods and
Money
• Markets work well due to circular flow
• One person’s output is another’s input
• Flow goes between households and firms
• Households include a person or group of
people
• Firms are businesses
• Land, labor & capital are traded for wages
• Goods are traded to people for money
Two types of markets in circular model
• Product market – deals with the goods and services
created by firms which are bought by the households
• Factor market – deals with factors given up by
households and paid for with wages or purchases of land
• Considered factor payments
• All these things work without intervention
because people are worried about their own
interest
• People work for money to buy goods, firms build
products to sell them for profit
Use the picture below and give an example of each of the arrows that
would represent what you or your parents gain/ lose in this model.
Higher Level Thinking
• How does the economic system/form of government
impact income inequality?
• Is one form better than another?
• You have now learned about the strenghts and
weaknesses of the 3 economic systems.
• After looking at the following videos, please respond to
the writing assignment.
•
http://www.bing.com/videos/search?q=globalization+income+inequality&FORM=HDRSC3#view=det
ail&mid=A85F58253C7DDF8C7D55A85F58253C7DDF8C7D55
•
http://www.bing.com/videos/search?q=effect+of+trade+on+global+income+inequality&qs=n&form
=QBVR&pq=effect+of+trade+on+global+income+inequality&sc=0-20&sp=1&sk=#view=detail&mid=8706D200A1593806790B8706D200A1593806790B
Exit Ticket
1.What are the three basic economic questions?
2.How does each type of economy answer the
three basic economic questions?
_________________________________________
 Homework – writing assignment