Economic Systems

Unit 2.1

The Three Economic Questions

• Any economic system must answer three questions, and it is how they answer these questions that determine what kind of economic system it is, from capitalism to communism.– What do we make? – How do we make it?– Who gets it?

What do we make? (Guns or

Butter?)• So, what do we make with scarce resources?

Since we cannot make everything, we need to decide what we will make. Should we make weapons, or consumer goods, and who decides?– Does the government decide?– Do we vote on it?– Whatever will sell for the most?– Viagra pills, or a cure for AIDS?

How do we make it?

• Just as important as what, is how. Do we go for the quickest possible construction, no matter what he consequences are, or do we move more slowly and carefully, even though it might take a long time?– Quick and dirty?– Slow and careful?– Ford or Ferrari?

Who gets it?

• Perhaps the question that most people focus on, and is more more personal than the other two questions, is who gets the products we all make? This question has lead to strikes, riots, and even revolutions.– Everyone?– Some people?– WASPs?– Whoever can pay $$$?

Economics as the foundation of Politics

• The interconnection of answering the three questions and government

Economic Systems

– Traditional Economy (Tribal?)– Market Economy (Capitalism)– Command Economy (Communism)– Mixed Economy (Socialism: Usually a mix of

Capitalism and Communism)

The Traditional Economy• These economies work well for small groups, are typically

long established and are resistant to change,• To prevent conflict, roles are well defined and often

ritualistic.• Traditional economies are usually not very productive, and

can only sustain a low density population. On the other hand, traditional economies are much more sustainable.