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 food, clothing, and shelter for its people. • The Economic System is the organized way a society provides for the wants and needs of its people.

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

Examples • The United States had many aspects of a traditional economy before the Great Depression. In the beginning of the 20 th century, 60% of the U. S. lived in farming communities, while 41% of the workforce was employed by farms

Examples • Since traditional economies center around a family or tribe, it is easy to use traditions gained from the experience of the elders to guide day-to-day life. Economic decisions are based on these traditions

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 (The USSR went from an agrarian to industrial nation in a very short time)

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 • People with new or unique ideas are stifled

Examples • Cuba, North Korea , China, Russia and Iran are the most commonly referenced examples of command economies.

Examples • The government allocates all resources according to the central plan. The goal is to use the nation's capital, labor and natural resources in the most effective way possible.

Market Economy • People and firms act in their own best interest to answer economic questions

Market Economy • Markets allow buyers and sellers to come together in order to exchange goods and services

Strengths • • • Markets can adjust over time Freedom exists for everyone involved Relatively small degree of governmental influence Decision making is decentralized Variety of goods and services are produced High degree of consumer satisfaction

Weaknesses • The primary weakness is deciding for whom to produce • The young, sick and old would have difficulty in a pure market environment • Markets sometimes fail – Competition (monopolies may develop) – Resource mobility (resources are sometimes hindered from moving about) – Availability of information (producers often have more information than do consumers, which gives them advantage)

Example • The U. S. is most commonly thought of the world's premier market economy. • One reason for its success is the U. S. Constitution, which had many provisions that facilitated and protected the market economy's six characteristics.

Mixed Economy • A mixed economy is a combination of market, command traditional economies. • The United States is a mixed economy because its Constitution protects the requirements of a market economy, including ownership of private property, limitations on government interference, and promoting innovation.

Mixed Economy • However, the Constitution also encourages the government to promote the general welfare. This allows the ability to effect a command economy, where needed. • In addition, many American traditions still guide economic policy.

Advantage of Mixed Economy • First, it can efficiently allocate goods and services where they are needed, by allowing prices to measure supply and demand. • Second, it also rewards the most efficient producers with the highest profit, ensuring that customers are getting the best value for their dollar.

Advantage of Mixed Economy • Third, it encourages innovation that meets customer needs more creatively, cheaply or efficiently. • Fourth, it automatically allocates capital to the most innovative and efficient producers. They, in turn, can invest the capital in more businesses like them.

Disadvantage of Mixed Economy • If it has too much free market, it can reward the competitive members of society and leave others without any government support.

Disadvantage of Mixed Economy • Businesses that are already successful can lobby the government for more subsidies and tax breaks. The government's role of protecting the operation of the free markets might mean not enough regulation, and ultimately taxpayer-funded bailouts of businesses that took on too much risk.