Economic SystemsToday’s Objective: To be able to differentiate between the three economic systems and their characteristics.

Types of Economic Systems

•Economic system:▫How society uses resources to satisfy

people’s wants

•Three basic systems: ▫Traditional▫Command▫Market economies

Economic Systems

•Read through the economic systems sheet

•With a partner list 3 examples of elements of each type of economic system that we find in the US economy

•Then list the pros and cons of each system

Types of Economic Systems•Traditional

Economy▫centers on families,

clans, or tribes decisions are

based on customs and beliefs

▫Good of the group always comes before individual desires

Characteristics of Traditional Economies

•Advantages and Disadvantages▫Advantages: little disagreement over goals,

roles methods of production, distribution

determined by custom▫Disadvantages: as result of resistance to

change, less productive do not use new methods; people not in jobs

they are best suited for low productivity results in low standard of

living

Types of Economic Systems cont.

• Command Economy▫ (centrally planned

economy) government makes economic decisions determines what to

produce; how to produce; who gets products

determines who is employed, work hours, pay scales

▫ Wants of individual consumers rarely considered

▫ Government owns means of production: resources and factories

Command Economies TodayNo pure

command economies today

Some economies still have mostly command elements

Command Economies Today• North Korea

▫ Communist North Korea used resources for military, not necessities built large army; nuclear

weapons program In 1990s and early

2000s, millions died of hunger, malnutrition

In 1990s, production decreased and economy shrank

Since 2003, some market activity allowed

Command Economies Today•Impact of Command Economies

▫In theory, command systems fair to everyone; In practice, many disadvantages central planners do not understand local

conditions workers have little motivation to be

productive or conserve resources artificially low prices lead to shortages people sacrificed to carry out centrally

planned policies

Types of Economic Systems cont.

• Market Economy▫ driven by choices of

consumers and producers consumers spend money,

go into business, sell their labor as they wish

producers decide how to use their resources to make the most money

▫ Consumers, producers benefit each other when they act in self-interest

Fundamentals of a Market Economy•1: Private Property and Markets•2:Limited Government Involvement

▫ Laissez faire—government should not interfere in economy

▫ Capitalism—system having private ownership of factors of production says producers will create products

consumers demand▫Actual market economies all have some

government involvement

Fundamentals of a Market Economy•3: Voluntary Exchange in Markets

▫ Voluntary exchange—traders believe they get more than they give up

•4: Competition and Consumer Sovereignty▫Consumer sovereignty—buyers choose

products, control what is produced▫Competition controls self-interested

behavior sellers offer low price or high value to please

consumers, make profit

Fundamentals of a Market Economy•5: Specialization and Markets

▫ Specialization—people concentrate their efforts in the activities they do best encourages efficient use of resources

leads to higher-quality, lower-priced products

Impact of Market Economies

•Advantages▫Individuals free to make economic choices,

pursue own work interests▫Less government control means political

freedom▫Locally made decisions mean better use of

resources, productivity▫Profit motive ensures resources used

efficiently, rewards hard work resulting competition leads to higher-quality,

more diverse products

Impact of Market Economies

•Disadvantages▫Pure market economy has no way to

provide public goods and services▫Does not give security to sick or aged▫During U.S. industrial boom, business

owners rich, workers low pay▫Businesses did not address problems

caused by industrialization▫Industrialized societies adopt some

government control of economy

Today’s Mixed Economies•Types of Mixed Economies

▫U.S. basically has market system▫European countries greater mix of market

and command elements France—government controls some

industries; provides social services Sweden—state owns part of all companies;

lifelong benefits, high taxes Namibia—traditional; state supports market,

foreign investment

Campus Parking Options

•Leave things as they have been

•First-come, first-served

•Markets and a price system

•Democracy

•Random choice

Traditional, Command, Market, Mixed?

• An economic system heavily influenced by habits, customs, and religious beliefs.  

• Government directly influences and vastly controls business practices due to ownership of natural and capital resources.

• Privately owned factors of production (i.e., factories and machines).

• Prices are influenced by supply and demand. • An economic system that combines elements of all the

other basic systems. • Characterized by very low unemployment rate. • Considered synonymous with a capitalistic economy. • Individual freedom is limited (roles of individuals are

static from generation to generation).

Dreaded Disease

•Read through the dreaded disease scenario

•With a partner answer the questions

•Keep in mind what we’ve discussed about economic systems and opportunity cost

Dreaded Disease

•What would be the “market” solution to the problem?▫Benefits?▫Opportunity cost?

•What would be the command solution to this problem?▫Benefits?▫Opportunity cost?

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