Economic Systems

I. Economic Systems

a. All societies use an economic system = organized way of providing for the wants and needs of their peopleb. There are three major kinds of economic systems…

II. Traditional Economiesa. Definition: the use of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom.

b. Characteristics: Individuals generally not free to make decisions based on what they want

i. Roles defined by elders and ancestors

c. Examples: Australian Aborigines, and other indigenous peoples around the world.

D. Advantages: everyone knows which role to playi. Little uncertainty of WHAT to produce, HOW to produce, and FOR WHOM.

E. Disadvantages: tends to discourage new ideasi. Punishment for those who act differently or break the rules

III. Command Economiesa. Definition: a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produceb. Characteristics: Can be head by king, dictator, president…

i. Government makes decisions

ii. Most severely limit private property rights

iii. Individual freedoms limited

iv. Government officials tend to favor themselves

c. Examples: North Korea, Cuba, and former USSRd. Advantages: it can change direction drastically

i. Many health and public services available to all at little or no cost

e. Disadvantages: ignore basic wants and needs of consumers

i. Tends to favor quantity over qualityii. Requires large decision-making bureaucracy = slows down decision making, and raises cost of productioniii. Can’t handle a crisis

IV. Market Economiesa. Definition: people make decisions in their own best interest

i. A market is an arrangement that allows buyers and sellers to come together to exchange goods and services.

b. Characteristics: A great deal of freedomi. People can spend their money the way they want, indicating WHAT, HOW and FOR WHOMii. Features private ownership of resourcesiii. Based on capitalism - an economic system where private citizens own the factors of production.

c. Examples: The US, Japan, South Korea, Singapore, Australia, Great Britain and parts of Western Europe

d. Advantages: high degree of individual freedom

i. Free to decide when and where you workii. Producers are free to decide who they hire, and HOWiii. Adjusts gradually iv. Relatively small government interferencev. High degree of consumer satisfaction

e. Disadvantages: does not provide for everyone

i. May not provide enough of the basic goods and servicesii. High degree of uncertainty

V. Mixed Economya. Most countries have mixed economies - systems that combine elements of all three types.– i. Socialism is a mixed economic and political system;

government owns/controls some, but not all, basic productive resources

– ii. Communism - extreme form of socialism - political and economic system where all property is collectively owned

b. Characteristics: Type of political system is less important than the way basic economic decisions are made.

i. State’s involvement can varyii. Each economic system used to answer WHAT, HOW and FOR WHOM

c. Examples: China & Norwayd. Advantages: provides assistance for those who might’ve been left out

i. In a democracy, voters can affect WHAT, HOW and FOR WHOM

e. Disadvantages: Costs of benefits can mean higher costs for citizens overall

i. Availability of services might be limitedii. Socialism and communism have proved to be less efficient than capitalism