Week 17 day 4- econ systems and 3 econ questions- computer lab
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 Scarcity = not having enough of something An economic system must answer 3 questions…
The 3 Economic Questions (3E?’s)1. WHAT TO PRODUCE? (What kinds of goods and services should be produced?)2. HOW TO PRODUCE? (What productive resources are used to produce goods and services?)3. FOR WHOM TO PRODUCE? (Who gets to have the goods and services?
Three Types of EconomicSystems: 1. Traditional Economy 2. Command Economy 3. Market Economy * Most countries are… Mixed Economies! (Market + Command)
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
How a Traditional Economy answers the 3E?’s 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
Traditional Economy Examples: Villages in Africa and South America the Inuit tribes in Canada the caste system in parts of rural India the Aborigines in Australia
Positives of a traditional economy Predictable Knowing what your job will be Knowing the way you will live
Problems with a traditional economyLack many resourcesOnly produce enough to live on
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
How a Command Economy answers the 3E?’s 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
Command System Countries with communist governments have Command economies Examples: There are no truly pure command economic systems, but close countries are: North Korea, former Soviet Union, Cuba *Germany and Russia have moved away from having a Command economy since 1991. Now they have a Mixed economy.
Positives of a command economy Because the government makes the decisions, people don’t have to worry about employment, housing, education, and healthcare
Problems with a command economy Consumers get low priority Little freedom of choice All resources are owned by the government
Market Economy An economic system in which production and distribution questions are answered by prices and profits (supply and demand) 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
How a Market Economy answers the 3E?’s 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
Market Economy There are no truly pure Market economies, but the United States is close.
In a truly free market economy, the government would not be involved at all There would be no laws to protect workers form unfair bosses There would be no rules to make sure that credit cards were properly protected Many societies have chosen to have some rules to protect consumers, workers, and businesses (MIXED) These rules reduce the freedoms that businesses have, but they also protect the workers and consumers
Positives of a market economy People can start their own businesses People have choice
Problems with a market economy The desire for money may lead to poor quality of goods and services Business owners have to risk losing money
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
How a Mixed Economy answers the 3E?’s 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
Mixed Economies Most democratic countries fall in this category (there are no truly pure Market or Command economies). Examples: Brazil, Mexico, Canada, UK, US, Germany, Russia, Australia, etc.
Positives of a Mixed economy Private Ownership of businesses Protects citizens/workers with government regulations Protects environment
Problems with a Mixed economyGovernment intervention can prevent profit for companies
Continuum of Economies Pure Pure Market Command Most NoIndividual Individual freedom freedomMost economies fall in between a puremarket and a pure command economyon the continuum
Economy ContinuumCommand Market Germany UK US Cuba Russia Australia
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