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Economic Systems
Economic Systems
• Survival for any society depends on its ability to provide food,
clothing, & shelter for its people
• The economic system is the organized way a society provides
for the wants & needs of its people
• Basic questions: What to produce? How to produce? For
whom to produce?
• 3 types of economies: traditional, command/central, & market
Traditional Economy
• Economic activity is based on ritual, habit, & custom
• Strengths
• Everyone knows their role
• Little uncertainty over what or how to produce
• “For whom to produce?” is answered by custom
• Life is generally stable, predictable, & continuous
• Weaknesses
• Tends to discourage new ideas
• Lack of progress leads to lower standard of living
Command/Central Economy
• Central authority makes most economic decisions; people
expected to go along with these decisions
• Strength
• Can drastically change direction in relatively short time
• Ex) USSR transitioned from agrarian to industrial very
quickly
• Weaknesses
• Large bureaucracy for economic planning
• Not designed to meet wants & needs of individuals
• Lack of incentives to work hard; leads to unexpected results
• Inflexible in dealing with minor, daily problems
• New, unique ideas stifled
Market Economy
• People & firms act in their own best interest to answer economic
questions
• Markets allow buyers & sellers to come together to exchange
goods & services
• Strengths
• Decentralized decision making
• Markets can adjust over time
• Freedom exists for those involved
• Relatively small degree of government influence
• Variety of goods & services produced
• High consumer satisfaction
Market Economy
• Weaknesses
• Primary weakness is deciding “For whom to produce?”
• Young, sick, & old would have difficulty in a pure market
environment
• Markets sometimes fail
• Competition (monopolies may develop)
• Resource mobility (resources are sometimes hindered from
moving about)
• Availability of information (producers often have more
information than consumers, giving them advantage)
Modern Examples
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United States
Inuit in Northern Canada
The rest of Canada
North Korea
Modern Examples
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United States: Market
Inuit in Northern Canada: Traditional
The rest of Canada: Market
North Korea: Command/Central
More Examples
More Examples
Command/Central
Market
Command/Central
Traditional
Market
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Capitalism & Free Enterprise
Capitalism & Free Enterprise
• Capitalism: a system in which people own their own labor & the property,
equipment, & other resources to make money
• Characteristics of a Free Enterprise Economy
• Economic freedom
• Voluntary exchange
• Private property & freedom to enter into contracts
• Profit motive
Characteristics of a Free Enterprise Economy
• Economic freedom
• You are free to choose your job, choose where and when you
work, work for yourself or someone else, leave your job & to
move to another job
• Businesses are free to choose which workers they want, figure
out how much business they want to do
• Voluntary exchange
• People & businesses want to do business with each other; they
aren’t forced
• When people & businesses do business, they are made better
off
Characteristics of a Free Enterprise Economy
• Private property & freedom to enter into contracts
• People have the right to do what they want with their own
property
• Private property gives people the motivation to work hard, save
money, & invest
• Private property motivates people to get ahead in life
• Contracts are agreements made between people to buy & sell
• Contracts can be written or spoken, but either way we are
legally bound to keep our agreements
Characteristics of a Free Enterprise Economy
• Profit Motive
• People are free to risk what they already own to make more
money
• The chance at becoming rich makes many people become
entrepreneurs
• Profit: how much better off a person or business is after a
period of time
• Profit Motive: the force that makes people and businesses want
to get more money
Roles of Entrepreneurs and Consumers
• Role of the entrepreneur
• Brings together people, resources & equipment to make a profit
• Motivate the economy by generating new ideas & methods of
doing things
• Because of the money that entrepreneurs make, this makes
other people want to go into business & compete, making
everyone better off
• Role of the consumer
• We, the consumers, rule the free enterprise economy.
• Our choices decide what is made, bought and sold in the
economy.
• CONSUMER SOVEREIGNTY
Roles of the Government
• Protector
• Makes & enforces laws against false advertising, unclean food &
medicine, pollution, unsafe products, etc.
• Enforces contracts & laws against workplace discrimination
• Provider & Consumer
• Provides products & services that business don’t – schools,
roads, military, welfare, etc.
• Buys things from businesses – fighter jets, aircraft carriers,
submarines, tanks, etc.
• Regulator
• Establishes rules for businesses to follow
• Ex) Decides which frequency radio stations can broadcast on;
creates rules for running nuclear power plants
Mixed Economy
• Combines elements of a market economy with elements of a command
economy
• Because the government plays a part in the US economy, we are not a true
free market economy
• Instead, we are called a modified free enterprise economy