Economic Systems Notes
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  • 1. Economic Systems UNIT TEN NOTES
  • 2. Economic Systems
    • An economic system describes how a country’s economy is organized
      • Because of the problem of scarcity , every country needs a system to determine how to use its productive resources
    • An economic system must answer 3 basic questions…
  • 3. Economic Systems
    • WHAT TO PRODUCE? (What kinds of goods and services should be produced?)
    • HOW TO PRODUCE? (What productive resources are used to produce goods and services?)
    • FOR WHOM TO PRODUCE? (Who gets to have the goods and services?
    • The way a society answers these questions determines its economic system.
  • 4. Four Types of Economic Systems:
    • 1. Traditional Economy
    • 2. Command Economy
    • 3. Market Economy
    • 4. Mixed Economy (Market + Command)
  • 5. Traditional Economy
    • An economic system in which economic decisions are based on customs and beliefs
    • People will make what they always made & will do the same work their parents did
    • Exchange of goods is done through Bartering : trading without using money
  • 6. Traditional Economy
    • Who decides what to produce?
      • People follow their customs and make what their ancestors made
    • Who decides how to produce goods & services?
      • People grow & make things the same way that their ancestors did
    • Who are the goods & services produced for?
      • People in the village who need them
  • 7. Traditional Economy
    • Examples:
      • Villages in Africa and South America; the Inuit tribes in Canada; the caste system in parts of rural India
  • 8. Command System
    • Government makes all economic decisions & owns most of the property
    • Governmental planning groups determine such things as the prices of goods/services & the wages of workers
    • This system has not been very successful & more and more countries are abandoning it
  • 9. Command Economy
    • Who decides what to produce?
      • Government makes all economic decisions
    • Who decides how to produce goods and services?
      • Government decides how to make goods/services
    • Who are the goods and services produced for?
      • Whoever the government decides to give them to
  • 10. Command System
    • Countries with communist governments have Command economies
    • Examples: Cuba, former Soviet Union, North Korea
    • *Germany and Russia have moved away from having a Command economy since 1991. Now they have a Mixed economy.
  • 11. Market Economy
    • An economic system in which economic decisions are guided by the changes in prices that occur as individual buyers and sellers interact in the market place
    • Most of the resources are owned by private citizens
    • Economic decisions are based on Free Enterprise (competition between companies)
      • Important economic questions are not answered by gov. but by individuals
      • Gov. does not tell a business what goods to produce or what price to charge
  • 12. Market Economy
    • Who decides what to produce?
      • Businesses base decisions on supply and demand and free enterprise (PRICE)
    • Who decides how to produce goods and services?
      • Businesses decide how to produce goods
    • Who are the goods and services produced for?
      • consumers
  • 13. Market Economy
    • There are no truly pure Market economies, but the United States is close.
  • 14. Mixed Economy
    • Market + Command = Mixed
    • There are no pure command or market economies. To some degree, all modern economies exhibit characteristics of both systems and are often referred to as mixed economies.
      • Most economies are closer to one type of economic system. than another
    • Businesses own most resources and determine what and how to produce, but the Government regulates certain industries
  • 15. Mixed Economy
    • Who decides what to produce?
      • businesses
    • Who decides how to produce goods and services?
      • Businesses, but the government regulates certain industries
    • Who are the goods and services produced for?
      • consumers
  • 16. Mixed Economy
    • Most democratic countries fall in this category (there are no truly pure Market or Command economies).
    • Examples: Brazil, Mexico, Canada, UK, etc.
  • 17. Which Economic System Is Best?
    • Market system has proven to be best because it promotes the goals of growth, freedom, & efficiency
      • Citizens are free to own their own property and use it in the most efficient and profitable way
    • Command and Traditional systems sometimes offer more security, but are not nearly as strong in efficiency, growth, freedom, and environmental quality