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 Systems
All 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