Economic Systems 1 Economic Systems Economic system An

Economic Systems

1 -Economic Systems • Economic system: ▫ An organized way of providing for the wants and needs of a society’s people. How society uses resources to satisfy people’s wants • Four basic systems: ▫ Traditional ▫ Command ▫ Market ▫ Mixed

TRADITIONAL ECONOMIES Characteristics • The use of scarce resources and other economic activity stems from ritual, habit or custom • Individuals are not free to make decisions based on what they want or would like to have. • Their roles are defined by the customs of their elders and ancestors.

TRADITIONAL ECONOMIES • Traditional Economy ▫ Centers on families, clans, or tribes ▫ Good of the group always comes before individual desires ▫ Hunting: share the spoils with other families in even portions

Characteristics of Traditional Economies Examples Australian Aborigines Northern Canada’s Inuits

Characteristics of Traditional Economies Advantages • Everyone knows which role to play. • Little uncertainty regarding what to produce or how to produce. • for whom to produce is determined by the customs and traditions of the society.

Characteristics of Traditional Economies Disadvantages • Tends to discourage new ideas or ways of doing things. • Strict roles have the effect of punishing people who act differently or break the rules. • Lack of progress leads to economic stagnation and a lower standard of living than in other economic systems.

COMMAND ECONOMIES • A central authority makes the major decisions about: What, How and for Whom to produce. • Led by king, dictator, or president who make the economic decisions.

COMMAND ECONOMIES Characteristics The government makes the major economic decisions: ▫ if houses or apartments will be built, they determine the best way to build them and who will receive them. Severely limit property rights: ▫ people not allowed to own their own homes, businesses and other productive resources [some personal items and tools are permitted.

COMMAND ECONOMIES • Characteristics Individual freedom limited: • Government decides what its universities should teach. • Government tends to favor themselves when making economic decisions: favored with luxury goods for themselves, not their people,

Examples of COMMAND ECONOMIES q. North Korea q Cuba q. USSR

Characteristics of COMMAND Economies Advantages • Can change direction drastically. • Many health and public services are available at little or no cost.

Characteristics of COMMAND Economies Disadvantages • Ignores basic wants and needs of consumers; gives people incentive to fill quotas in production rather than producing a good product. • Requires a large decision-making bureaucracy. • The planning bureaucracy lacks the flexibility to deal with minor day-to-day problems. • Rewards for individuals are rare

MARKET ECONOMIES • People make decisions in their own best interest. • A market is an arrangement that allows buyers and sellers to come together to exchange goods and services

MARKET ECONOMIES Characteristics • A great deal of freedom: people spend their money on products they want most. ▫ This tells producers what products people want. • Businesses are free to find the best production methods. • Income that consumers earn and spend in the market determines for Whom to produce.

MARKET ECONOMIES Characteristics • Private ownership of resources • Based on capitalism: An economic system where private citizens own the factors of production

Characteristics of Market Economies Advantages • High degree of individual freedom. • Adjusts to change gradually over time. • Relatively little government interference. • Decision-making decentralized. • Variety of goods and services. • High degree of customer satisfaction.

Characteristics of Market Economies Disadvantages • Does not provide for everyone. • May be difficult for some people to survive. • May not provide enough of some basic goods and services. • High degree of uncertainty.

MIXED ECONOMIES Economic system that combines the elements of all three types: q. Traditional, q. Command q. Market economies

MIXED ECONOMIES • Disadvantages

MIXED ECONOMIES Advantages • Provides assistance for people otherwise left out. • If society has democracy, voters can use electoral power to affect what, how and for whom decisions.

MIXED ECONOMIES Disadvantages • Costs for benefits can be high. • Availability of services may be limited or the quality may deteriorate over time.