Economic Systems

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Economic Systems
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Why do we have Economic Systems?

• Survival for any society depends on its ability
  to provide food, clothing, and shelter for its
  people.
• The Economic System is the organized way a
  society provides for the wants and needs of its
  people.

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Four Economic Systems

• Traditional Economy
• Command Economy
• Market Economy
• Mixed Economy

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Traditional Economy

• Economic activity is based on ritual, habit and
  custom

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Strengths of Traditional Economies

• Everyone knows their role
• Little uncertainty over what to produce or how to
  produce
• The question of For Whom to produce is answered
  by custom
• Life is generally stable, predictable, and
  continuous

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Weaknesses of Traditional Economies

• Tends to discourage new ideas
• Lack of progress leads to lower standard of living

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Examples

• The United States had many aspects of a
  traditional economy before the Great Depression.
  In the beginning of the 20th century, 60 of the
  U.S. lived in farming communities, while 41 of
  the workforce was employed by farms

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Examples

• Since traditional economies center around a
  family or tribe, it is easy to use traditions
  gained from the experience of the elders to guide
  day-to-day life. Economic decisions are based on
  these traditions

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Command Economy

• Central authority makes most economic decisions
• Economic decisions are made at the top and the
  people are expected to go along with choices
  their leaders make

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Strengths of Command Economies

• Change direction drastically in a relatively
  short time (The USSR went from an agrarian to
  industrial nation in a very short time)

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Weaknesses of Command Economy

• Not designed to meet the wants and needs of
  individuals
• Lack of incentives to work hard leads to
  unexpected results
• Large bureaucracy for economic planning
• Not flexible in dealing with minor day to day
  problems
• People with new or unique ideas are stifled

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Examples

• Cuba, North Korea , China, Russia and Iran are
  the most commonly referenced examples of command
  economies.

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Examples

• The government allocates all resources according
  to the central plan. The goal is to use the
  nation's capital, labor and natural resources in
  the most effective way possible.

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Market Economy

• People and firms act in their own best interest
  to answer economic questions

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Market Economy

• Markets allow buyers and sellers to come together
  in order to exchange goods and services

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Strengths

• Markets can adjust over time
• Freedom exists for everyone involved
• Relatively small degree of governmental influence
• Decision making is decentralized
• Variety of goods and services are produced
• High degree of consumer satisfaction

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Weaknesses

• The primary weakness is deciding for whom to
  produce
• The young, sick and old would have difficulty in
  a pure market environment
• Markets sometimes fail
• Competition (monopolies may develop)
• Resource mobility (resources are sometimes
  hindered from moving about)
• Availability of information (producers often have
  more information than do consumers, which gives
  them advantage)

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Example

• The U.S. is most commonly thought of the world's
  premier market economy.
• One reason for its success is the U.S.
  Constitution, which had many provisions that
  facilitated and protected the market economy's
  six characteristics.

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Mixed Economy

• A mixed economy is a combination of market,
  command and traditional economies.
• The United States is a mixed economy because its
  Constitution protects the requirements of a
  market economy, including ownership of private
  property, limitations on government interference,
  and promoting innovation.

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Mixed Economy

• However, the Constitution also encourages the
  government to promote the general welfare. This
  allows the ability to effect a command economy,
  where needed.
• In addition, many American traditions still guide
  economic policy.

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Advantage of Mixed Economy

• First, it can efficiently allocate goods and
  services where they are needed, by allowing
  prices to measure supply and demand.
• Second, it also rewards the most efficient
  producers with the highest profit, ensuring that
  customers are getting the best value for their
  dollar.

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Advantage of Mixed Economy

• Third, it encourages innovation that meets
  customer needs more creatively, cheaply or
  efficiently.
• Fourth, it automatically allocates capital to the
  most innovative and efficient producers. They, in
  turn, can invest the capital in more businesses
  like them.

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Disadvantage of Mixed Economy

• If it has too much free market, it can reward the
  competitive members of society and leave others
  without any government support.

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Disadvantage of Mixed Economy

• Businesses that are already successful can lobby
  the government for more subsidies and tax breaks.
  The government's role of protecting the operation
  of the free markets might mean not enough
  regulation, and ultimately taxpayer-funded
  bailouts of businesses that took on too much risk.