Economic Systems All Economic Systems seek to answer
- Slides: 21
Economic Systems
All Economic Systems seek to answer the three basic economic questions • 1) What to produce? • 2) How to produce? • 3) For whom to produce?
Traditional Economies • Basic economic questions answered by what has been done in the past • Traditions are maintained • Ritual, Habit, and Custom
Traditional economies • Individual roles and choices are defined by the customs of elders and ancestors • These economies are usually based in societies of hunter/gatherers • Sharing is a big part of these economies
Examples of Traditional economies • Australian aborigines
The Mbuti in Central Africa
The Inuit of Northern Canada
How do Traditional economies answer the three basic questions? • 1) What to produce? Whatever ritual, habit or custom dictates • 2) How to produce? However ritual, habit or custom dictate • 3) For whom to produce? For whomever ritual, habit or custom dictate
Advantages of Traditional economy • There is little to no uncertainty • Everyone knows what role to play • Life is generally stable, predictable, and continuous
Disadvantages of Traditional economies • Tend to discourage new ideas and new ways of doing things • Lack of progress lowers standard of living
Command Economies • Basic economic questions answered by the government (central authority)
Examples of Command economies • Only one command economies left – North Korea • All others have mixed in market economy with their command structure (China)
North Korea
How do Command economies answer the basic economic questions? • 1) What to produce? Whatever the government says to produce • 2) How to produce? However the government tells you to produce • 3) For whom to produce? For whomever the government tells you to produce (ideally the entire society)
Advantages of Command economy • Because the government has total control over production and its factors, these economies can change rapidly. • Whatever is needed most will be produced. • There is no uncertainty (people are told when and how to work) • Free education, health care, and other public services
Disadvantages of Command economy • Economy designed to meet needs not wants • No incentive to work hard (people don’t often lose their jobs, so they do the bare minimum to get by) • Large bureaucracy means slow decision making, raises cost of production, lacks flexibility • No reward for initiative which slows progress
Market Economies • Basic economic questions answered by consumers • Dollars = Votes
Examples of Market economies • USA, Canada, UK, etc.
Advantages of Market Economies • Adjusts to change based on consumer wants • High degree of individual freedom • Low levels of government interference • Because individuals (with money) make the decisions, everyone (with money) has a voice in the way the economy runs • Wide variety of available goods & services • Many choices = high degree of consumer satisfaction
Disadvantages of Market Economies • Poverty: only those with money can participate • Market does not provide for people’s basic needs. Governments must attempt to do this (think Katrina). • High degree of uncertainty people lose jobs, businesses fail • Greed based system puts profit before people
What is a Mixed Economy? • A mixed economy blends components of two or more of the following economic systems to varying degrees: traditional, market, and command
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