ECONOMIC SYSTEMSEssential Questions:

1. How do different societies around the world meet their economic needs?

2. What are the advantages and disadvantages of each economic system?

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Economics The study of how people meet their basic needs.

Problem of Scarcity: unlimited wants with limited resources

Example: Gasoline/Oil

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Economics cont’dSocieties must answer 3 questions

What to produceHow to produceFor whom to produce

How these questions are answered determines its economic system.Traditional Economy (Amish)Free Enterprise (Market)Communist Economy (Command)Socialist Economy (Mixed)

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Traditional economyPeople meet their basic needs much as their ancestors did.

Economic decisions are made on the basis of customs and beliefs handed down from one generation to another.

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Traditional economy cont’dProduction Methods

Subsistence Agriculture: Farmers grow just enough to feed themselves and their families.

Cottage Industries: Goods like textiles are produced in private homes by hand, usually by the entire family.

Free Enterprise economyPeople freely produce and buy what they want.

3 questions are answered by the interplay between consumers and producers.

Prices are set by the interaction of supply/demand.

Free Enterprise economy cont’dProducers invest their money in order to make a profit.

There is little government interference.

Inefficient producers are eliminated by going out of business.Also called a market economy.Examples: United States, Japan, Hong Kong, China (communist political system) working on creating Free Enterprise economy

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Communist economy

Government sets economic goals to be met.

Workers labor together and are supposed to share equally in the fruits of their labor.

Private property ownership is abolished.

The government owns/operates all businesses

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Communist economy cont’dDeveloped by Karl Marx in the 1800s.

Also called a command economy.Examples:

Former Soviet Union (1917-1991)

Cuba North Korea

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SOCIALIST economyGovernment owns some basic industries.

Private ownership of smaller businesses is allowed.

Government provides low-cost or free public services: schools, health care, etc.

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SOCIALIST economy cont’dAlso called a mixed economy.Examples:

Sweden and Israel.India- Socialist 1947-1991,working towards free enterprise

Western European countries: France, Germany, UK

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Review In Indonesia, the government owns

large industries and sets some prices. However, private businesses are also encouraged and several hundred are actively traded on the Indonesian Stock Exchange. This country’s economy system can be best be classified as-A. TraditionalB. Free EnterpriseC. SocialistD. Communist ANSWER: C

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Review cont’dIn which economic system would you expect the widest selection of consumer goods?A. TraditionalB. Free EnterpriseC. SocialistD. Communist ANSWER: B

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Review cont’dAn essential characteristic of a communist economy is the-A. Interaction of supply and demandB. Organization of worker unionsC. Privatization of businessD. Government ownership of property ANSWER: D

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review