Economic Systems

Introduction

In any type of economic system, three basic questions must be answered:

1. What will be produced?2. How will it be produced?3. For whom will it be produced?

We classify economic systems according to how they answer these questions.

Traditional Economy“That’s The Way We’ve Always Done It Ville”

• Economic questions answered according to custom & tradition

• Production is done the way it has always been done.

• Examples Rural areas of South America & Africa

Command Economy“We Do What We’re Told Ville”

• Economic questions answered according to government direction

• Government controls all economic activity

• Example Communist North Korea

A Pure Command Economy

• The government controls the factors of production and makes all the decisions.

• The government is responsible for answering the three economic questions:

– How? The government owns all the factors of production and makes

allthe decisions about production

– Who? The government decides who receives what is produced in theeconomy

– What? One person (a dictator) or a group of government officials

(centralplanning committee) decides what is to be produced

Market Economy“Make As Much As We Want Ville”

• Economic questions answered according to wishes of buyers & sellers

• Individual choice determines progress of market

• Example United States

A Pure Market Economy

• No government involvement in economic decisions

• The government lets the people answer the three basic economic questions:

– What? Customers decide through their purchases (consumer sovereignty)

– How? This is left up to the individual business –BUT- a business

mustbe profitable

– Who? People who have money can buy more – this encourages

hardwork and investments

Questions…

Is the United States a PURE Market Economy?

Does it operate without any type of government

intervention?

Mixed Economy

• No system in the world is PURE

• Mixed Economy Economic system that incorporates elements of different systems (usually command and market)

• Example: United States – Market Malls, restaurants, entrepreneurship– Command Minimum wage, labor laws– Traditional “blue laws”, Chick Fil-A

Mixed Economies• All economies are mixed; they are

classified based on how much the government is involved in the process

• Some government involvement through mandatory laws and regulations that businesses follow– Labor Laws, Minimum Wage

• The government provides social programs for those who need help– Medicare, welfare

Continuum of Economic Systems