TYPES OF ECONOMIES
How do they answer our needs
QUESTIONS OF THE DAY
➤ How
do traditional, market and
command economies answer the
questions of what to produce, how to
produce and for whom to produce?
➤ Which
why?
system is most effective and
TO ANSWER THESE QUESTIONS YOU MUST KNOW
➤ (1)What
are the three economic questions
every society must answer?
➤ (2)What
basic economic goals do societies
➤ (3)What
types of economic systems exist
have?
today?
➤ (4)What
are the advantages and
disadvantages of each system?
WHAT IS AN ECONOMIC SYSTEM?
The method used by a society to
produce and distribute goods and
services.
THE THREE ECONOMIC QUESTIONS SOCIETIES MUST ANSWER
All systems must answer these questions because
of the law of scarcity. (the idea that we can never
have enough of what we want)
➤
What goods and services should be produced?
➤
How should these goods and services be
produced?
➤
Who consumes these goods and services? (For
whom do we produce?)
Every society has some system or mechanism that turns
that society’s resources into useful goods and services.
THE FOUR ECONOMIC SYSTEMS
➤ Traditional
economies rely on habit, custom, or ritual to
decide what to produce, how to produce it, and to whom to
distribute it.
➤ Command
economy the central government makes all
decisions about the production and consumption of goods
and services.
➤ Market economy economic decisions are made by
individuals and are based on exchange, or trade.
➤ Mixed economies are systems that combine tradition and
the free market with limited government intervention
COMPARING THE ECONOMIC SYSTEMS
Economic system
Who answers the 3 questions?
Traditional
Customs
Market
Individuals who spend $
Command
Central Government
Mixed
Individuals with $ and some
government involvement
TRADITIONAL ECONOMY
TRADITIONAL ECONOMIES
➤A
traditional system relies on
habit, custom or ritual to decide
what to produce, how to produce
it and who to distribute it to.
➤Agricultural
societies
and hunting
TRADITIONAL ECONOMIES
➤ Individual
roles and choices are
defined by customs of elders and
ancestors
➤ these
economies are usually based in
societies of hunter/ gatherers
➤ sharing
is a big part of these
economies
HOW DOES TRADITIONAL ECONOMY ANSWER THE 3 ?’S
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
➤Life
knows what role to play
is stable, predictable and
continuous
DISADVANTAGES OF TRADITIONAL ECONOMIES
➤ Tend
to discourage new ideas or ways of
doing things
➤ Lack
of progress lowers standard of
living
TRADITIONAL ECONOMY RECAP
Found in rural, underdeveloped countries–
Vanuatu
Pygmies of Congo
Eskimos & Indian tribes
Belarus
Customs govern the
economic decisions that are
made
Farming, hunting and
gathering are done the
same way as the generation
before
Economic activities are
centered around the
family or ethnic unit
Men and women are given
different economic roles
and tasks
Advantages: people have
specific roles; security
in the way things are
done
Disadvantages:
Technology is not used;
difficult to improve
MARKET ECONOMY
MARKET ECONOMY
➤
Also know as capitalist economy
➤
Markets exist because none of us produced all the
goods and services we require to satisfy our needs
and wants
➤
A market is an arrangement that allows buyers and
sellers to exchange goods and services
➤
Markets economies push specialization ( the
concentration of productions of individuals or
companies to a few things)
HOW DOES MARKET ECONOMY ANSWER THE 3 ?’S
1) What to produce? Whatever people buy.
Supply and demand.
2) How to produce? The cheapest most efficient
way in order to increase profit.
3) For whom to produce? For whomever can buy
the goods or services.
Basic economic questions answered by consumers
people vote with their money
ADVANTAGES OF MARKET ECONOMY
➤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
➤
MARKET ECONOMY RECAP
Also called a Free Market
Economy or Free
Enterprise Economy
Businesses and consumers
decide what they will
produce and purchase
and in what quantities
Decisions are made
according to law of
supply & demand
Supply and demand of goods
and services determine
what is produced and the
price that will be charged.
Advantage—competition to
have the best products and
services
Disadvantage—huge rift
between wealthy and poor
Note: a true market economy
does not exist.
COMMAND ECONOMY
COMMAND ECONOMY
➤
The government, or central authority controls the economy
➤
In an command economy, the government owns both land and
capital. The government decides what to produce, how much
to produce, and how much to charge.
➤ Socialism
is a social and political philosophy based on the
belief that democratic means should be used to distribute
wealth evenly throughout a society.
➤ Communism
is a political system characterized by a centrally
planned economy with all economic and political power
resting in the hands of the government. Communist
governments are authoritarian in nature.
HOW DOES COMMAND ECONOMY ANSWER THE 3 ?’S
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 ECONOMIES
➤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
COMMAND ECONOMY RECAP
The government (or central
authority) determines what,
how, and for whom goods and
services are produced.
Two types:
Strong Command – where
government makes all
decisions (communism –
China, Cuba)
Moderate Command – where
some form of private
enterprise exists but the
state owns major resources
(socialism – France and
Sweden)
Advantages
Guarantees equal
standard of living for
everyone
Less crime and poverty
Needs are provided for
through the government
Disadvantages
Minimal choices
Fewer choices of items
No incentive to produce
better product or
engage in
entrepreneurship
Also known as a Planned or
Managed Economy
MIXED ECONOMY
MIXED ECONOMY
➤A
➤
➤
mixed economy blends components of two
or more of the following economic systems
to varying degrees: traditional, market, and
command
It is doubtable that any nation can exist
successfully under a pure command
economy or a pure market economy.
Most economies mix features of both
systems.
MIXED ECONOMY RECAP
➤
➤
➤
Combination of
a market and a
command
economy
Government
takes of
people’s needs
Marketplace
takes care of
people’s
wants.
➤
➤
➤
Most nations have a
mixed economy:
United States,
England, Australia
Advantage —
balance of needs
and wants met by
government and
in marketplace
Disadvantage —
citizens have to
pay taxes
LETS REVIEW
QUESTIONS OF THE DAY
➤ How
do traditional, market and
command economies answer the
questions of what to produce, how to
produce and for whom to produce?
➤ Which
why?
system is most effective and
EXIT SLIP
Answer the question in one paragraph (at least 5 sentences).
Use evidence from the readings and or the powerpoint to prove
your answer.
➤ Which
economic system is most
effective and why?
QUIZ TIME (ANSWER EACH IN AT LEAST 3 SENTENCES)
➤ (1)What
are the three economic questions
every society must answer?
➤ (2)What
basic economic goals do societies
➤ (3)What
types of economic systems exist
have?
today?
➤ (4)What
are the advantages and
disadvantages of each system?