TYPES OF ECONOMIC SYSTEMS
Types of Systems

The question that each economy faces is whether they want prices, quantities, distribution of goods and
services, and distribution of income to be determined by the private sector or the public sector.

Private sector – made up of consumers and businesses.

Public sector is the government. There are different levels of government : local, state and federal.


Some services are produced by both private and public agencies such as education, trash collection, and
security.
The groups in the economy are consumers, businesses, and government.
An Economic System designed around consumers and
Players
Goal
businesses.
Examples
Consumers
Maximize personal utility
Some people maximize their utility (happiness) by
purchasing material goods.
Some people maximize their utility by giving away
their time and money to charity/ missions.
http://www.youtube.com/watch?v=90HhZ-pyC2Y
Businesses
Maximize long-run profit
Businesses maximize profit to make owners
happy!
http://news.exxonmobil.com/press-release/exxonmobil-corporation-announces-estimated-secondquarter-2013-results
Government
Maximize social welfare
http://www.edd.cahwnet.gov/Unemployment/Fed
eral_Unemployment_InsuranceExtensions.htm
Government’s goal is to make the masses happy,
not just one group of people or businesses.
Types of Economies
•
Command
- governments determines
prices and quantities
produced
•
Capitalistic

•
free market interaction
between buyers and sells
determines prices and
quantities produced
Mixed

a mix where in some
markets the government is a
buyer, regulator, or
producer.

Even with a free market
capitalist system there are
times when the system does
not operate in a manner
that best suits the overall
population. These
occurrences are known as
free market breakdowns.
Some of these free market
breakdowns are on the
“Free Market Breakdown”
page on the website.
Principles of Capitalism




Capitalism addresses the needs of consumers and
businesses.
Capitalism attempts to solve problems without
government intervention.
Capitalism inspires free enterprise.
Capitalism promotes private property rights.
Five Questions each economy must address


How a country answers these questions reveals the
type of economic system that will prevail.
A capitalistic country looks to the private sector to
address these questions.
Question: 1

 It
How much should the economy produce?
depends on the resources it has available
 The
resources are land, labor, capital and entrepreneurial
spirit. The goal is to use each of the resources efficiently.
US Farmland
1997, 2002 and 2007 Census of Agriculture
Approximate total
land area (acres)
Total farmland
(acres)
Percent of total land
area
Cropland (acres)
Percent of total
farmland
Percent irrigated
•
1997
2002
2007
2,262,462,020
2,263,960,501
2,260,994,361
954,752,502
938,279,056
922,095,840
http://news.exxonmobil.com/press42.2%
41.4%
release/exxon-mobil-corporationannounces-estimated-second-quarter445,324,765
434,164,946
2013-results
40.8%
406,424,909
46.6%
46.3%
44.1%
11.5%
11.6%
12.7%
On the arable land, which is only 11% of Japan's total land area, the population density is among the highest in the
world.
•
145,833 sq mi in Japan – 15,000 square miles of farmable land
•
9,600,000 square acres
• Census of Agriculture • Contact NASS Customer Service, 1-800-727-9540.
2. What should be produced?
3. How are the goods and services
produced?

By the most efficient companies.

Top Ten Most Profitable Companies

Sometimes by the government.






In a capitalistic system the best companies survive, the weaker
companies go out of business.
1 Royal Dutch Shell oil
3 Exxon Mobil oil
5 China National Petroleum oil
7 State Grid oil
9 Volkswagen
2 Wal-Mart Stores
4 Sinopec Group oil
6 BP oil
8 Toyota Motor
10 Total oil
4. Who receives the output?
Income Distribution by Quintile
YEAR
BOT 20
MID 20
TOP 20
TOP 5
2010
116,011
3.9
8.8
13.9
20.2
53.5
23.5
2005
114,384
3.4
8.6
14.6
23
50.4
22.2
2000
108,209
3.6
8.9
14.8
23
49.8
22.1
1990
94,312
3.8
9.6
15.9
24
46.6
18.5
1970
64,778
4.1
10.8
17.4
24.5
43.3
16.6
The Distribution of Income is not equal
in the United States.



In the US the top 20 percent of wages earners make 53
percent of the income.
The bottom 20 percent of the wage earners make 3.9 percent
of the money.
In a Communist Society, theoretically every one would make
the same amount. Their would be no rich or poor. Yet, there
would also be no incentive to work hard because everyone
makes the same amount.
Percent of Taxes Paid by Quintile
5. Can the system adapt to change?
Country
Agriculture
Industry
Service
United States
0.9%
20.4%
78.6%
South Korea
3.3%
40.7%
56%
13.1 %
46%
41%
Indonesia
Employment by Sector
Occupations
1900
2010
number percent
number
percent
Agriculture
10.4
35.7%
4.3
2.9%
Manufacturing
7.1
24.4%
11.5
7.8%
Trade and
Transportation
4.8
16.5%
24.9
16.8%
Services
6.8
23.4%
107.3
72.5%
Total
29.1
In millions
148
These were so cool!
State of the Art
Change does occur in the US without
government intervention.



Businesses change to earn profit. Cell phones
have gotten smaller, batteries last longer,
service has improved. Why? Because
companies want to earn profit, and these
qualities attract consumers!
Music is now played on a Smart Phone, MP3 or
I-Touch.
Why? Because companies want to earn profit
and these smaller units attract consumers.
The U.S. Economy is mixed.


Some goods and
services are produced
by private companies.
Some goods and
services are produced
by the government.

The trend in the US is
for more government.
There are pros and
cons of more
government. The
biggest cons are
incentive to work and
large deficits. The pros
are stability and
equality among
citizens.
How can the type of economic system
be determined?
Government percent of overall spending



http://anepigone.blogspot.com/2008/0
3/government-spending-as-percentageof.html
http://www.usgovernmentspending.com
http://www.heritage.org/index/Ranking.
aspx
Property Rights are important in
Capitalism



Tragedy of the Commons
Ownership is necessary,
otherwise no one will
value the property.
The Family Pond – passed
down to the next
generation.
Why has the government sector grown
so much?

Free Market
Breakdowns?