Economic

Systems
Economic System
The way in which a country handles
its economic decisions and solves
economic problems
How countries make earning and
spending decisions
Each country must establish
Four Basic Elements
Resources (Factors of Production)
Natural resources (Land)
Human resources (Labor)
Capital goods (Capital)
Entrepreneurship
Markets
Buying and selling goods and services
Market = both buyers and sellers
Four Basic Elements
Participants
Producers, consumers, government
Producers create goods/services
Consumers purchase for use
Government makes/enforces laws for system
Medium of exchange
To obtain good/service
Most common is money
Without it, people would have to barter
(trade)
Need for Economic Systems
No country has enough resources to
supply everything
Choices must be made
No way to balance supply and demand
Avoid shortages of some goods and surpluses
of others
People are interdependent
Depend on each other to get what they
need
Types of Economic Systems
Economic systems are divided, but
none are a pure system
Contains elements from other systems
Traditional
Command
Communist
Socialist
Market
Traditional Economic
Systems
Traditions from generations
Habits, customs, and beliefs
Very few new ideas or improvements
Subsistence level
Barely supports life
Consume all they produce
Examples: Asia, Africa, Latin America
Command Economic
Systems
Government owns and operates many or
all means of production and distribution
Key role in planning and decision-making
Consumer decision making limited
Two types:
Communism
Socialism
Communism
Means of production and
distribution are owned and
controlled by the government
Economic planning, decisions, and
control of the system
Sets prices, establishes quotas, tell
workers where they will work, provides
capital for business investment
Example: China
Socialism
Government owns part of the means of
production and determines how products
will be distributed
Private ownership exists
Pay scales set by government
Welfare states
Free medical care, education, welfare, etc.
High taxes
Example: Great Britain
Market Economic Systems
Individuals and businesses own or control
the means of production and distribution
Government control of business is limited
Workers are motivated to work for profit
Allocation of resources is controlled by market
Activity moves in a continuous circle
Example: United States, Japan
Basic Economic Questions
What will be produced?
Must be answered first
Depends on: profit, wants/needs, resources
How will products be produced?
Methods of production, resources,
technology, etc.
How will products be allocated?
Seldom possible for everyone to have equal
share
Problems With
Traditional Economies
No growth or progress
Produce only what they need, never
save
Vicious cycle
Low incomes, low savings, low capital,
low productivity
Problems with Communist
Command Economies
Delayed economic development
because individuals cannot invest
No competition
Inefficient use of resources
Government controls what will be
produced and wages paid
Problems with Socialist
Command Economies
High taxes for individuals and high cost of
production
High priced products, reduces national
income
Privately owned businesses abide by
states master plan
Government encourages and
discourages types of work
Workers paid according to value of work
in eyes of government
Problems with
Market Economies
Financial loss, government will not assist
Competition is source of some problems
Some products not produced because
producers not ensured profit
Heavy influence on some items to
produce
Incomes are not equal
Resources in short supply
How do the different
economies answer the three
basic economic questions?
Traditional Economies
Communist Command Economies
Socialist Command Economies
Market Economies