The Three Economic Questions

• What goods and services to produce?

• How should goods and services be produced?

• For whom will goods and services be produced?

How a country answers these questions determines what type of economic system it has.

Economic Models

• Traditional•Market•Command

Traditional

Answers the three economic questions based on the past. Customs, culture, and religion dictate decision-making such as production of goods and services.

Family and community ties are highly valued. Agricultural Change occurs very slowly.

Pure Market

Individuals own and control all economic resources. Government does not intervene in the economy.

An economy must have some degree of government intervention in the economy. (examples; the enforcement of contracts and the settling of disputes)

Regulation is required for stability. An industry/business should have the ability to self-regulate. Failure to do so serves as an invitation for government to intervene.

Pure Command

• Government owns and controls all economic resources and makes all economic decisions. Although some communist economies may seem this way, everyone has at least some property and decision making authority.

Economic SystemsAll economic systems are “mixed” economies: Capitalism Democratic Socialism Authoritarian Socialism (Communism)

Capitalism

• Economic resources are owned and controlled by individuals.

• Prices are set through the interaction of supply and demand.

• Government has a limited role in the economy (only for the protection of society).

Advantages of Capitalism

• Market efficiency• Economic prosperity• Personal freedom Freedom of choice; products, careers, location, and education• Private property• Competition; lower prices, better quality and more variety• Lower taxes

Disadvantages of Capitalism

• Instability• Economic inequality• Does not meet everyone’s needs• Fewer public goods and services• Higher Unemployment

Democratic Socialism• Major economic resources are owned by

government (transportation, communication, and utilities). Other resources are owned by individuals.

• Individuals maintain basic human rights.• Government leadership is determined

through elections with peaceful transition of leadership.

Advantages of Democratic Socialism

• Economic equality• Low unemployment• More public goods and services Universal healthcare Retirement pensions University education• Meets the needs of most people.

Disadvantages of Democratic Socialism

• Redistribution of incomes• High taxes• Less freedom• Lack of incentive• Lack of motivation• Government sets prices for government owned

resources.• Government decides the allocation of

government owned resources.

Authoritarian Socialism

Government owns and controls the economic resources and answers the three economic questions through collective decision-making.

Advantages of Authoritarian Socialism

• Nationalism• Focus on a strong military• Equality (classless society)• State supplies many public goods including; employment housing healthcare education• Meets everyone’s needs• Job security

Disadvantages of Authoritarian Socialism

• Government transitions are usually violent• Government rules through propaganda and

fear.• Redistribution of income• Limited decision-making/choice• Lack of motivation/incentive• High taxes