Economic Systems

Different economic systemsWhat goods and services will be produced and in what quantities?

How will each of the goods and services be produced?

For whom will the various goods and services be produced?

 4 types of economic systems …the traditional systemthe command systemthe market systemmixed system

The traditional system

Traditional system: the same goods are produced and distributed in the same way by each successive generation.

+ Provides clear and easy answers 3 central questions.

- Rigid & slow to adapt to changing conditions; resists innovation.

The command systemCommand system: participants are instructed what to produce and how to produce it by a central authority which also determines how the output is distributed. AKA centrally planned systems.

Central planners answer 3 central questions.

The market systemMarket system: economic system in which there is free competition and prices are determined by the interaction of supply and demand.

3 central questions answered by market mechanism.

VIDEO: https://www.youtube.com/watch?v=ulyVXa-u4wE

The functions of prices in a market economy

The rationing functionRation scarce supplies to those who place the highest value on them (and can afford to pay for them).

The allocative function

Prices send signals • Excess demand• Prices increase

• Higher prices = increased profits• Additional entrants into market

• Supply increases• Prices drop back to equilibrium

Characteristics of Economic SystemsClick on the following page to unjumble the characteristics of different economic systems…