Economic SystemsEconomic Systems

Chapter 2Chapter 2

Economic SystemsEconomic Systems

►An economic system is an An economic system is an organized way of providing for the organized way of providing for the wants and needs of the society’s wants and needs of the society’s people.people.

►It is how societies choose to It is how societies choose to answer our three basic questions. answer our three basic questions. (What, How, and For Whom?)(What, How, and For Whom?)

Traditional EconomiesTraditional Economies

►In traditional economies, the In traditional economies, the allocation of scarce resources, and allocation of scarce resources, and nearly all other economic activity, nearly all other economic activity, stems from ritual, habit, or custom.stems from ritual, habit, or custom.

►Usually, habit and customs dictate Usually, habit and customs dictate most social behavior, and most social behavior, and individuals are not free to make individuals are not free to make decisions on what they want or decisions on what they want or would like to have.would like to have.

Traditional EconomiesTraditional Economies

►AdvantagesAdvantages

--Everyone knows their role—WHAT --Everyone knows their role—WHAT questions answered for themquestions answered for them

--Everyone knows HOW to produce --Everyone knows HOW to produce (same as their parents did before (same as their parents did before them)them)

--FOR WHOM questions answered --FOR WHOM questions answered by customs and traditionsby customs and traditions

Traditional EconomiesTraditional Economies

►Disadvantages:Disadvantages:

--Discourages new ideas (and --Discourages new ideas (and therefore new economic growth)therefore new economic growth)

--Lack of progress leads to lower --Lack of progress leads to lower standard of livingstandard of living

Command EconomiesCommand Economies►A command economy is one in A command economy is one in

which a central authority makes which a central authority makes most of the WHAT , HOW, and FOR most of the WHAT , HOW, and FOR WHOM decisions.WHOM decisions.

►Economic decisions are made by Economic decisions are made by the government: the people have the government: the people have little, if any, influence over how the little, if any, influence over how the basic economic questions are basic economic questions are answered.answered.

Command EconomiesCommand Economies

►Advantages:Advantages:

--Can change direction in a --Can change direction in a relatively short period of timerelatively short period of time

--There is little uncertainty about --There is little uncertainty about one’s role in the societyone’s role in the society

--Government provides social --Government provides social reforms/programs for little to no reforms/programs for little to no cost to the publiccost to the public

Command EconomiesCommand Economies►Disadvantages:Disadvantages:

--Not designed to meet the wants --Not designed to meet the wants of consumersof consumers

--No Flexibility--No Flexibility

--Little to no individual incentives--Little to no individual incentives

Market EconomiesMarket Economies►In a market economy people and In a market economy people and

firms act in their own best interest firms act in their own best interest to answer the WHAT, HOW, and to answer the WHAT, HOW, and FOR WHOM questions.FOR WHOM questions.

►A market is any mechanism that A market is any mechanism that allows buyers and sellers to find allows buyers and sellers to find each other and trade their goods each other and trade their goods and services.and services.

►People’s decisions influence the People’s decisions influence the WHAT, HOW, and FOR WHOM.WHAT, HOW, and FOR WHOM.

Market EconomiesMarket Economies

►Advantages:Advantages:--Can adjust to change over time--Can adjust to change over time--High degree of individual freedom--High degree of individual freedom--Relatively small degree of --Relatively small degree of government interferencegovernment interference--Decision making is decentralized --Decision making is decentralized (not given to the central (not given to the central government)government)--Variety of goods and services --Variety of goods and services available to consumersavailable to consumers--High degree of customer --High degree of customer satisfaction and standard of livingsatisfaction and standard of living

Market EconomiesMarket Economies►Disadvantages:Disadvantages:

--Doesn’t provide basic needs for --Doesn’t provide basic needs for everyone in the society (poor, elderly, everyone in the society (poor, elderly, sick)sick)--Doesn’t provide public services --Doesn’t provide public services (system of justice, national defense, (system of justice, national defense, health care)health care)--High degree of uncertainty--High degree of uncertainty--Must be reasonably competitive, --Must be reasonably competitive, resources must be reasonably free to resources must be reasonably free to move from one activity to another, and move from one activity to another, and consumers need access to adequate consumers need access to adequate info to make wise decisions or economy info to make wise decisions or economy can fail very easilycan fail very easily

Mixed EconomyMixed Economy

►An economy in which there are An economy in which there are some elements of a traditional some elements of a traditional economy, some elements of a economy, some elements of a command economy, and some command economy, and some elements of a market economyelements of a market economy

►What the U.S. is said to haveWhat the U.S. is said to have