Economic Systems

UNIT FIVE NOTES

Economic Systems
When deciding how to use its limited resources, every country answers 3 questions about production and distribution What will be produced? How will it be produced? For whom will it be produced? How a country answers these questions depends on the type of economic system they have

Four Types of Economic Systems:

1. Traditional Economy
2. Command Economy 3. Market Economy 4. Mixed Economy

Traditional Economy
An economic system in which production and distribution questions are answered by looking to the past People will make what they always made; will do the same work their parents did Economic decisions are made by customs and beliefs Example: Inuit; some parts of Africa and South America

Command System
An economic system in which production and distribution questions are answered by central planners (government) Example: North Korea, former Soviet Union, Cuba, *most Communist countries --Germany and Russia have moved away from having a Command economy since 1991. Now they have a Mixed economy. Economic decisions are made by the government

Command System (Cont.)

Planners estimate what goods will be needed in the future and work backward to decide what materials and workers are needed now Planners can be wrong about future needs, and they do not provide people with many choices Example: Farming--the government decided who would be farmers, what they would grow, and how much would be turned over to the government

Market Economy
An economic system in which production and distribution questions are answered by prices and profits Economic decisions are based on Free Enterprise Most Democratic countries have a variation of a Market economy & a Command economy (Mixed economy) There are no truly pure Market economies, but the US and the United Kingdom are close

Market Economy (Cont.)

Businesses will make these products and provide those services to earn a profit Servicesin economics, work done for others; hotels, restaurants, and doctors all provide services Businesses will make things using whatever materials, labor, and technology earn the highest profit Standard of living is higher under a market system than the others as it often has rapid technological change

Market Economy (Cont.)

The price of a good depends on how much of the good is available and how many people want it Producers turn resources into goods and services Resources are raw materials, such as oil, peoples labor, machinery, and minerals Governments can also be producers when they provide goods such as roads and schools, or when they provide services such as military production or health care

Market Economy (Cont.)

Consumers, or buyers, purchase goods and services
Consumera buyer and user of goods and services

Producers and consumers come together to exchange goods and services Exchange is giving up one thing in return for another
In a traditional economy, exchange is most likely to be in the form of barter

Mixed Economy
Individuals own most resources and determine what and how to produce Government regulates certain industries Example: China; most nations Market + Command = Mixed