2. 2
Objectives
List the three basic economic questions.
List the three types of economic systems.
Explain who answers the economic
questions in each type of economy.
Describe the three major features of a
market economy.
Explain why most economies are mixed.
4. 4
The Three Questions
The problem of scarcity leads to the
three economic questions
What should we produce?
How should we produce it?
Who should get the products?
#1 Who answers these questions
for the U.S. economy?
8. 8
Types of
Economic Systems
Economic systems are classified
based on who answers the three
questions
Types of economic systems
traditional
command
market
10. 10
Traditional Economy
Traditional economies developed
early in human history
Following tradition is seen as a way of
keeping the society safe and healthy
There is pressure on traditional
economies to become modern.
Very few traditional economies exist.
#2. What is tradition?
11. 11
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
#3. How could government control of the
economy affect your life?
12. 12
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 Socialist Economy
13. 13
Market Economy
In a market economy
individuals answer the economic
questions
Market economies developed with a
political philosophy called democracy
democracy emphasizes individual rights
market economies emphasize individual
choice
14. 14
Market Economy
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
17. 17
Economic Freedom
Economic freedom
individuals are free
– to make their own
economic
decisions
– to start any legal
business
– to decide what
career to choose
18. 18
Economic Freedom
A market economy is also called
free enterprise and private enterprise
because
– enterprise is another term for business
– people are free to start enterprises
– private individuals (as opposed to the
government) can start enterprises
#4 How is this different from a
command economy?
19. 19
Market Forces
Market forces control a market
economy.
Free market economy is another term
for market economy
because market forces are “free” to
influence the economy
#5. How is this different from a
command economy?
20. 20
Command and Market Economies
Features Command Market
Political philosophy Communism
Socialism
Democracy
Who answers the
three economic
questions?
Central
government
Individuals
Who controls the
economy?
Central
government
Market forces
Who owns the
economic inputs?
Central
government
Individuals
21. 21
Command and Market Economies
Features Command Market
Main
features
Government
ownership of land
and capital
Government
control of labor
Government
control of all
economic activity
Private property
Economic
freedom
Market forces:
supply and
demand, profit
motive, and
competition
22. 22
Command and Market Economies
Features Command Market
Other
names
Centrally planned
economy
Communist
economy
Socialist
economy
Welfare state
Capitalism
Capitalist
economy
Consumer
economy
Free enterprise
Free market
economy
Private enterprise
23. 23
Mixed Economies
Most modern economies are mixed.
Why?
both market and command economies have
flaws
market economies are unstable
command economies are too complicated to
successfully plan and control
For these reasons, there are no pure
command or pure market economies
24. 24
Mixed Economies
In a mixed economy
both the government and individuals
– are involved in making economic
decisions
Four types of mixed economies
mixed command economy
transition economy
mixed socialist economy
mixed market economy
25. 25
Mixed Command
Economy
Mixed command economy
command economy with some market
elements
During much of the 20th century, China
was a communist country with a pure
command economy
but the Chinese economy had difficulty
meeting the needs of its people
26. 26
China had over 1.3 billion people in
2006, more than any other country
27. 27
Mixed Command
Economy
In 1978, the Chinese government
started reforms to bring aspects of a
market economy to China
– less government involvement in
farming and industry
– individuals allowed to start and run
small businesses
28. 28
Transition Economy
Transition economy
changing from command to market
The Soviet Union was one of the great
command economies of the 20th century
its economy had trouble providing for the
needs of its citizens
economic and other problems caused the
Soviet Union to break up in 1991
it became 15 independent countries
29. 29
Many of the newly independent
countries have transition economies
30. 30
Mixed Socialist
Economy
Mixed socialist economy
democratic political system
economy that combines market and
command elements
France, Sweden, and other countries
with a mixed socialist economy are
called
social democracies
31. 31
Mixed Socialist
Economy
Market/Democratic elements
citizens vote and have many rights
citizens can start and run businesses
Command/Socialist elements
government collects a large percent of
income as taxes, to use to ensure a
decent standard of living for everyone
government owns and operates major
industries
32. 32
Mixed Market
Economy
A mixed market economy is a market
economy with some command elements
The United States is a mixed market
economy because government
helps people in need through social security
and welfare benefits
regulates business
collects income taxes, but not as much as in
a social democracy
33. 33
A Continuum
Continuum
a graph that shows two opposite qualities
– that blend in proportion from one end
to the other
a good way to look at modern economies
34. 34
A Continuum
A continuum of economic systems has
a pure command economy at the left
– total government control
a pure market economy at the right
– individual and market forces totally in
control
A country’s position on the continuum
depends on the amount of government
or individual control
35. 35
Amount of governmental control
Legend
Amount of individual control
Pure
Command
Pure
Market
Continuum of Economic Systems
Cuba China France
Sweden
United States
Where on the continuum do
the following countries belong?
Cuba, China, France, Sweden, United States
36. 36
Review
What are the three economic
questions?
What are the three types of
economies?
What are three features of a market
economy?
How is a command economy different
from a market economy?
Why are most economies mixed?
37. 37
Glossary
capitalism. Another term for market
economy.
capitalist economy. Another term for
market economy.
centrally planned economy. Economy in
which the national government makes
all the economic decisions; also called
command economy.
Back
38. 38
Glossary
command economy. Economy in which
the national government makes all the
economic decisions; also called
centrally planned economy.
consumer economy. Another term for
market economy because consumers
have a great influence on this type of
economy through what they buy and
how much they buy.
Back
40. 40
Glossary
market economy. Economy in which
individuals answer the economic
questions and market forces are
allowed to operate; also called
capitalism, capitalist economy,
consumer economy, free enterprise,
free market economy, and private
enterprise.
Back
41. 41
Glossary
mixed economy. Economy in which
both the government and individuals
are involved in making economic
decisions.
private enterprise. Another term for
market economy.
Back
42. 42
Glossary
traditional economy. Economy in which
the economic questions are answered
by the elders based on the society’s
traditions.
transition economy. Economy that is
changing from command to a more
market economy.
Back
