Economic Systems Why do we have Economic Systems

Economic Systems

Why do we have Economic Systems? Survival for any society depends on its ability to provide essential needs for its people. An economic system is simply the way that society provides for its people

How do we tell what system we are operating under? Just look how the three economic questions are answered How does the country decide What/How/and Who?

Three (four) Economic Systems Traditional Economy Command Economy Market Economy (Mixed Economy)

Traditional Economy Economic activity is based on ritual, habit and custom

Strengths of Traditional Economies Everyone knows their role Little uncertainty over what to produce or how to produce The question of “For Whom to produce” is answered by custom Life is generally stable, predictable, and continuous

Weaknesses of Traditional Economies Tends to discourage new ideas Lack of progress leads to lower standard of living

Where do we see this in action today? Emerging markets or third world economies Africa, Latin America, Arctic, Middle Eastern Bedouins, Mongol Nomads

Command Economy Central authority makes most economic decisions Economic decisions are made at the top and the people are expected to go along with choices their leaders make

Strengths of Command Economies Change direction drastically in a relatively short time Seen in the Communist “five year plans”

Weaknesses of Command Economy Not designed to meet the wants and needs of individuals Lack of incentives to work hard leads to unexpected results Large bureaucracy for economic planning Not flexible in dealing with minor day to day problems Entrepreneurship is not encouraged Black market necessity for wants

Where do we see this in action today? China (kind of), Cuba, North Korea

Market Economy Based on the principal of supply and demand All players act in selfinterest Competition based, OTSS Private property and the market rule

Strengths Markets can adjust over time Freedom exists for everyone involved Relatively small degree of governmental influence Decision making is decentralized Variety of products High degree of consumer satisfaction

Weaknesses The primary weakness is the answer to the question “who gets it” The young, sick and old would have difficulty in a pure market environment Markets can fail Subject to economic fluctuations Markets dependency on human interactions Distribution of income Government increasing cannot be “laissez-faire” anymore

How does each system answer the Three Economic Questions?

Command Economy

Is entrepreneurship encouraged? In limited situations. Usually “free thinking” is discouraged. Unless it is something the government sees as beneficial to society or government driven

Can you choose your job? Government will usually assign jobs or send students to appropriate schools One can “choose” a job, but the command authority will set quotas on the number of positions

What motivates workers? Pride in country Fellow man Community Social well-being

What to produce? Quotas dictated by the goals of the central authority

How to produce? Government ensures the most efficient use of resources is being established per their guidelines

Who gets it? Government will supply based on need and equality

Traditional Economy

Is entrepreneurship encouraged? Only minor changes that come very slowly

Can you choose your job? NO Based on what your family has always done.

What motivates workers? Family Tradition History Country

What to produce? Tradition

How to produce? Tradition

Who gets it? Tradition

Market Economy

Can you choose your job? This is only limited by the following: Education Training Experience Free will

Is entrepreneurship encouraged? This is the key to this economic system This brings new businesses New ideas New inventions New markets (cell phones)

What motivates workers?

What to produce? Consumers decide this.

How to produce? Producers, most efficient way.

Who gets it?