Download PPT Economic Systems

Economic Systems
Human wants are unlimited,
but resources are not.
Economic System
An economy, or economic system, is
the way a nation makes economic
choices about how the nation will use its
resources to produce and distribute
goods and services.
Resources, also called factors of
production, are all the things used in
producing goods and services.
The basic resources available to a society
are:
•Natural
•Human
•Capital
•Entrepreneur
• Natural refers to everything on
Earth that is in its natural state, or
Earth's natural resources.
• Human refers to all the people who
work in the economy.
• Capital refers to the things that are
themselves produced and then used
to produce other goods and
services. Examples: tools,
equipment, computers, desks, trucks,
buildings
Three Economic Questions
All economies must answer three
questions:
1. What goods and services will be
produced?
2. How will they be produced?
3. For whom will they be produced?
The Economic Problem
Given scarce resources, how do
societies answer the three basic
economic questions?
Every society has some system that
transforms that society’s scarce
resources into useful goods and
services.
Three Economic Systems
• Traditional Economy
• Command Economy
• Market Economy
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Standards Used to Distinguish
Economic Systems
Some standards used to distinguish
among economic systems are:
• Who owns the resources?
• What decision-making process is used to
allocate resources and products?
• What types of incentives guide economic
decision makers?
Traditional Economy
What: In a traditional economy, goods
and services are produced by the family
for their personal consumption.
How: A traditional economy is shaped
largely by custom or religion.
Traditional Economy
For Whom: In a traditional economy,
resources are allocated according to longlived practices from the past. There is little
surplus (something extra) and little trade (or
exchange of goods).
Traditional Economy
In a traditional economy, there is only a
limited need for markets (places to buy and
sell goods and services).
Traditional Economy
A traditional economy is the type of
economy found in less developed nations,
usually in rural areas.
Examples: Amish, Mennonites, Eskimos,
Bush People
Command Economy
In a command economy, all resources
are collectively owned and directed by
the government.
In a command economy, the
government decides what and how
much to produce.
In a command economy, the government
answers the three basic economic questions:
1. What? A dictator or a central planning
committee decides what products are needed.
2. How? Since the government owns all
means of production in a command economy,
it decides how goods and services will be
produced.
3. For whom? The government decides who will
get what is produced in a command economy.
Command Economy
In a command economy, the government
decides where to locate economic
activities.
Command Economy
In a command economy, the government
decides what prices to charge for goods,
including agricultural goods and services.
Command Economy
In a command economy, economic
decisions are often made to further the
goals of the government.
Command Economy
In a command economy, production
costs (how much it costs to make an
item), are not reflected in the cost of the
item.
For example, in a command economy it
might cost $2.00 to produce a loaf of
bread, but the price might be set at $1.00
in order to ensure that customers are
able to afford adequate food.
Command Economy
In a command economy, the price might
be set higher than the production costs.
For example, in a command economy it
might cost $5,000.00 to produce a car,
but the price might be set at $10,000.00
in order to ensure that only the wealthy
can buy it.
Command Economy
Communism: Government owns and has
control of all decisions and resources.
Socialism: Private ownership of land and
small business is allowed. Government
controls all large businesses and natural
resources.
Market Economy
(free enterprise, capitalism)
What: Individual producers must figure out
how to plan, organize, and coordinate the
production of products and services.
For Whom: In a market economy, resources
are allocated through individual decision
making.
Market Economy
(free enterprise, capitalism)
• How: In a free-market country, people
can own their own businesses and
property. People can also buy services
for private use, such as healthcare.
(But most capitalist governments also
provide their own education, health and
welfare services. )
Market Economy
(free enterprise, capitalism)
• In a market economy, prices act as
signals of scarcity. When the price of
something is high, that means it's more
scarce. Demand for it is high relative to
the supply.
Market Economy
(free enterprise, capitalism)
• When the price of something is low, then
it's less scarce. By observing prices,
consumers and producers can choose
their behavior to respond to scarcity.
Market Economy
(free enterprise, capitalism)
• High prices encourage producers to
switch from more scarce to less scarce
resources, and they encourage
consumers to switch from products and
services that require more scarce
resources to products and services that
require fewer scarce resources.
Market Economy/Mixed
Economy
Mixed Economy: Private ownership of
land and businesses.
Producers make decisions that affect their
life and business.
Government: Makes some decisions to
prevent monopolies, poor business
practices, and abuse.