Download Economic Systems

Economic Systems
Why do we have
Economic Systems?
 Survival
for any society
depends on its ability to
provide essential needs for
its people.
 An economic system is
simply the way that society
provides for its people
How do we tell what system
we are operating under?
 Just
look how the three economic
questions are answered
 How does the country decide
What/How/and Who?
Three (four) Economic
Systems
Traditional
Economy
Command Economy
Market Economy
(Mixed Economy)
Traditional Economy
Economic
activity is
based on
ritual,
habit and
custom
Strengths of Traditional
Economies
Everyone knows their
role
 Little uncertainty over
what to produce or
how to produce
 The question of “For
Whom to produce” is
answered by custom
 Life is generally stable,
predictable, and
continuous

Weaknesses of Traditional
Economies
 Tends
to discourage new ideas
 Lack of progress leads to lower
standard of living
Where do we see this in
action today?
 Emerging
markets
or third world
economies
 Africa,
Latin
America, Arctic,
Middle Eastern
Bedouins, Mongol
Nomads
Command Economy
 Central
authority makes
most economic
decisions
 Economic decisions are
made at the top and the
people are expected to
go along with choices
their leaders make
Strengths of
Command Economies


Change direction drastically in a relatively short time
Seen in the Communist “five year plans”
Weaknesses of
Command Economy






Not designed to meet the
wants and needs of individuals
Lack of incentives to work hard
leads to unexpected results
Large bureaucracy for
economic planning
Not flexible in dealing with
minor day to day problems
Entrepreneurship is not
encouraged
Black market necessity for
wants
Where do we see this in
action today?
 China
(kind of), Cuba, North Korea
Market Economy

Based on the
principal of supply
and demand

All players act in selfinterest

Competition based,
OTSS

Private property
and the market rule
Strengths
 Markets
can adjust over
time
 Freedom exists for
everyone involved
 Relatively small degree
of governmental
influence
 Decision making is
decentralized
 Variety of products
 High degree of
consumer satisfaction
Weaknesses
 The
primary weakness is the answer to the
question “who gets it”
 The young, sick and old would have difficulty in
a pure market environment
 Markets can fail

Subject to economic fluctuations
 Markets dependency on human interactions
 Distribution of income
 Government increasing cannot be “laissez-faire”
anymore
How does each system
answer the Three Economic
Questions?
Command Economy
Is entrepreneurship
encouraged?

In limited situations.
Usually “free thinking”
is discouraged.

Unless it is something
the government sees
as beneficial to
society or
government driven
Can you choose your job?

Government will usually assign jobs or send students to
appropriate schools

One can “choose” a job, but the command authority will set
quotas on the number of positions
What motivates workers?

Pride in country

Fellow man

Community

Social well-being
What to produce?
Quotas
dictated by
the goals of
the central
authority
How to produce?
 Government
ensures the
most efficient
use of
resources is
being
established
per their
guidelines
Who gets it?
 Government
will supply based on
need and equality
Traditional Economy
Is entrepreneurship
encouraged?

Only minor changes that come very slowly
Can you choose your job?

NO

Based on what your family has always done.
What motivates workers?
Family
Tradition
History
Country
What to produce?
Tradition
How to produce?
Tradition
Who gets it?
Tradition
Market Economy
Can you choose your job?

This is only limited by the following:

Education

Training

Experience

Free will
Is entrepreneurship
encouraged?

This is the key to this economic system

This brings new businesses

New ideas

New inventions

New markets (cell phones)
What motivates workers?
What to produce?

Consumers decide this.
How to produce?

Producers, most efficient way.
Who gets it?