Economic Systems

Quick Review:
• Take out a sheet of paper and answer the
following questions:
– What are Goods?
– What are Services?
– What are Resources?
– What is Scarcity?
 Economic Resources
1. Natural resources: Raw materials found
in nature that are used to produce goods.
2. Human Resources: People’s knowledge,
efforts and skills used in their work.
3. Capital Resources: Used to produce
goods and services (buildings, materials
and equipment).
Scarcity Shortage of
resources
 Four factors of production
• Land
• Labor
• Capital
• Entrepreneurship
 Economic Systems
• Def. The method used by a society to
produce and distribute goods and
services.

• Or, How the government tells us what we

can get and how to get it!
 All Economic Systems Must
Consider the Following Questions:
1. What goods and services to produce?
2. How will they produce them?
3. Who will get them?
4. How much will they produce now, and
how much later?

• Each economic system answers these

questions in a DIFFERENT WAY.
 What Should We
Produce?

or

7 Corn Cattle
 How Should We
Produce It?

or

8 Paper and Pencil Computer

 Who Should Get the Products?

or

9 Queen Commoners
 Types of Economic Systems
There are 3 basic types of economic
systems.
1. Traditional Economy
• Economic questions are answered by
habits and customs (the way it has always
been done)
• Children work the same jobs parents
worked, often farming or hunter/gatherer
• Fear Change!
 2. Command Economy
• In a command economy
– the national government makes all the
economic decisions
• Main features
– government ownership of land and capital
– government control of labor
– government control of all economic activity
 2. Command Economy
• A command economy is also called a
centrally planned economy
– because the national government is also
called the central government, and
– the central government plans
• all aspects of the economy
• Ideally, in a command economy
– everyone shares equally in the limited
resources
 2. Command Economy
• The government answers the basic
economic questions
• Advantages: able to act quickly in
emergencies, provide for all people
equally
• Disadvantages: Inefficient, no incentive to
work hard or be creative
• Ex. Communist Countries (China,
Vietnam, North Korea, Cuba)
 2. Command Economy
There are two types:
1.Strong Command- where government
makes all decisions (communism-China
Cuba)
2.Moderate command- where some form of
private enterprise exists but the state owns
major resources (socialism- France and
Sweden)
 2. Command Economy
Advantages Disadvantages
• Basic Needs taken care • No incentives
of • Requires a large
• Education, public health, bureaucracy
other services cost very • New and different ideas
little if anything are discouraged
• Very little unemployment
Does a command economy answer
the big three questions?
• What is being produced?
– Whatever the government decides
• How is it being produced?
– The government will tell someone to make it
• For whom is it being produced?
– Whomever the government decides needs it
 3. Capitalism/Free Market
Economy
• Economic questions are answered by
individual buyers and sellers.
• Supply and demand influence economy
• People act out of self interest; motive for
profit (money) drives the economy
• Also known as FREE ENTERPRISE or
CAPITALISM
• Ex. The United States
 Capitalism
• In capitalism
– individuals answer the economic questions
• Economies developed with a political
philosophy called democracy
– democracy emphasizes individual rights
– market economies emphasize individual
choice
• A market economy is also called a
consumer economy
– because consumers have a great impact on
this economy
• Three features of a market economy
– private property
– economic freedom
– market forces
 • Economic freedom
• Private property – individuals are free
– individuals have the right to • to make their own
buy and own economic decisions
• land • to start any legal business
• capital goods • to decide what career to
choose
Advantages Disadvantages
• Individual Freedom for all • Rewards only productive
• Lack of government people
interference • Workers and businesses
face uncertainty
• Incredible variety to (Competition)
choose from • Not enough public goods
• High degree of consumer (Education, health,
satisfaction. defense).
• Private property
 Command and Capitalism
Features Command Capitalism

Political philosophy Communism Democracy

Socialism
Who answers the Central Individuals
three economic government
questions?
Who controls the Central Market forces
economy? government
Who owns the Central Individuals
economic
23 inputs? government
 Command and Capitalism

Features Command Capitalism

Main Government Private property

features ownership of land Economic
and capital freedom
Government Market forces:
control of labor supply and demand,
Government profit motive, and
control of all competition
economic activity
 Command and Capitalism

Features Command Capitalism

Other Centrally planned Capitalism

names economy Capitalist
Communist economy
economy Consumer
Socialist economy
economy Free enterprise
Welfare state Free market
25 economy
 Resources

Money

Households Businesses

Money

Goods or Services
Circular flow model