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Introduction to Economic SystemsCritical
Questions

• What key economic questions must every society
  answer?
• What basic economic goals do societies have?
• What types of economic systems exist today?

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What is an economic system?

• The method used by a society to produce and
  distribute goods and services

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The Three Questions that Determine a Societies
Economic System

• Because ALL economic resources are scarce, every
  society must answer three questions
• What goods and services should be produced?
• Guns or butter?
• How should these goods and services be produced?
• What combination of factor resources should we
  use?
• Who consumes these goods and services?
• How will income be distributed?

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• Every society has some system or mechanism that
  transforms that societys scarce resources into
  useful goods and services.

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Four Economic Systems
An economic system is the method used by a
society to produce and distribute goods and
services.
Traditional economies rely on habit, custom, or
ritual to decide what to produce, how to produce
it, and to whom to distribute it. In a centrally
planned economy the central government makes all
decisions about the production and consumption of
goods and services.
In a market economy economic decisions are made
by individuals and are based on exchange, or
trade. Mixed economies are systems that combine
tradition and the free market with limited
government intervention.
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Comparing Economic Systems

• Who answers the 3 ?s
• Customs
• Individuals
• Central Government
• Individuals with some government involvement

• Economic System
• Traditional
• Market
• Command
• Mixed

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Traditional System

• A traditional system relies on habit, custom or
  ritual to decide what to produce, how to produce
  it and to who to distribute it.
• Agricultural and hunting societies

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• There is little room for innovation or change.
• They tend to lack modern conveniences and have a
  low standard of living.
• Close knit communities with focus on the family
  unit.

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Traditional Economy

• Found in rural, under-developed 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

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Why Do Markets Exist?
Markets exist because none of us produces all
the goods and services we require to satisfy our
needs and wants.
A market is an arrangement that allows buyers and
sellers to exchange goods and services.
Specialization is the concentration of the
productive efforts of individuals and firms on a
limited number of activities.
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Free Markets

• In a free market economy, households and business
  firms use markets to exchange
  money and products.
• Households own the factors
  of production
  and consume goods and services.

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Advantages of the Market

• Economic Efficiency
• As a self-regulating system, a free market
  economy is efficient.
• Economic Growth
• Because competition encourages innovation, free
  markets encourage growth.

• Economic Freedom
• Free market economies have the highest degree of
  economic freedom of any economic system.
• Additional Goals
• Free markets offer a wider variety of goods and
  services than any other economic system.

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Market Economy (Free Enterprise)

• Supply and demand of goods and services determine
  what is produced and the price that will be
  charged.
• Advantagecompetition to have the best products
  and services
• Disadvantagehuge rift between wealthy and poor
• Note a true market economy does not exist.

• 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

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Command Economies

• The government,or
• central authority controls the economy.

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Organization of Command Economies
In a command economy, the government owns both
land and capital. The government decides what
to produce, how much to produce, and how much to
charge.
Communism is a political system characterized by
a centrally planned economy with all economic
and political power resting in the hands of
the government. Communist governments are
authoritarian in nature.
Socialism is a social and political philosophy
based on the belief that democratic means should
be used to distribute wealth evenly throughout a
society.
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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
• Guarantees equal standard of living for everyone
• Less crime and poverty
• Needs are provided for through the government
• Disadvantages
• Minimal choices
• Fewer choices of items
• No incentive to produce better product or engage
  in entrepreneurship
• Also known as a Planned or Managed Economy

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The Soviet Experiment

• Land, labor and capital was all controlled by the
  state. The best resources were allocated to to
  the armed forces, space program, and production
  of capital goods.
• Government committees decided the quantity,
  process and distribution of all products.
• The government created large state-owned farms
  and collectives to produce all agricultural
  products.
• Under this system there was little incentive to
  produce, and the Soviet Union saw a rapid decline
  in the production of agricultural goods.

STALIN
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The Meaning Behind the Flag

• The hammer and sickle originate from the
  unique Russian unity of the peasants (the
  sickle) with the workers (the hammer) who
  together formed the Soviet Russian state.
• The Red field is symbolism of the blood that has
  been spilt by workers the world over in the fight
  for their emancipation.
• The single yellow star is the representation of
  the life and immense energy of the sun, empty
  because within is the blood or production of
  workers struggle.

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Command economy face problems of poor-quality
goods, shortages, and diminishing production.
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Other Problems in Centrally Planned Economies

• Performance falls short of the set ideals
• Fail to meet consumer needs and wants
• Little individual incentives to work hard
• Lack of improvement
• Expensive and inflexible government structure
  needed to manage the system
• Sacrifice of individual freedoms to pursue
  societal goals

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Mixed Economies

• It is doubtable that any
  nation can exist
  successfully under a pure command economy or a
  pure market economy.
• Most economies mix features of both systems.

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Mixed Economy

• Combination of a market and a command economy
• Government takes of peoples needs
• Marketplace takes care of peoples 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

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An economic system that permits the conduct of
business with minimal government intervention is
called free enterprise. The degree of government
involvement in the economy varies among nations.
Nations are placed on a continuum (a range with
no clear divisions) of mixed economies. On one
end are centrally planned economies and on the
opposite end are free markets economies.
Comparing Mixed Economies