Economic SystemsEconomic Systems

Essential QuestionsEssential Questions

What are the 4 factors of production?

What are 3 basic economic questions all societies must answer?

What are the basic economic systems that exist in world today?

What are the differences between these economic systems?

Factors of Production Because of the problem of scarcityscarcity, every

nation must decide how to allocate limited resources

There are 4 Factors of Production4 Factors of Production: Capital- financial resources (money) needed to purchase

other capital goods Entrepreneurship- the ability to complete the

managerial functions of gathering, allocating & distributing economic resources or consumer goods

Land- includes timber, fisheries, rivers , farms and other natural resources on the land necessary to produce

Labor- human capital available to transform raw or national resources into consumer goods

How Does An Economy Work?

Societies must answer 3 basic Economic questions: What goods and services should be

produced? How should the goods and services be

produced? For whom should the goods and

services be produced? The way a society answers these

questions defines their economic system.

Types of Economic Systems

All economic systems fall into one of three broad categories: Traditional (or primitive) System Market (or Capitalist) System Command (or Planned) System

No economy can be purely market or purely command

Elements of both market & command are found in all systems- this makes most economies MixedMixed

Traditional Economy

original economic system in which traditions, customs & beliefs shape the goods and products the society creates What to produce? How to produce it? and For Whom it should be produced? Are all

decided by customs & traditions of past generations

Examples of Traditional economies would be the Inuit (Eskimo) in Alaska and Australian aborigines

Traditional Economies Traditional Economies are typically:

found in underdeveloped areas of the world

are in rural or isolated areas allow very little modern technology usually based on subsistence agriculture or hunting and gathering uses bartering & trade rather than currency most activities centered around family almost no surplus is produced

A Pure Market Economy

No government involvement in economic decisions

The consumers & producers answer the three basic economic questions What? Customers decide through their

purchases How? This is left up to the individual

business –BUT- a business must be profitable

Who? People who have money can buy more – this encourages hard work and investments

A Pure Command Economy

The Government controls the factors of production and makes all the decisions The government is responsible for answering the

three economic questions What? One person ( a dictator) or a group of

government officials (central planning committee) decide what is to be produced

How? The government owns all the factors of production and makes all the decisions about production

Who? The government decides who receives what is produced in the economy

Mixed Economies

Some government involvement through mandatory laws and regulations that businesses follow Labor Laws, Minimum Wage, OSHA codes

The government provides social programs for those who need help Medicare, welfare, Obamacare

All economies are mixed they are classified based on how much the government is involved in the process

Continuum of Economic Systems

Command Economy

Communism

On the far left

Market Economy

Capitalism

On the far right

SocialismLeft of center but right of communism

Capitalism

An economic system characterized by private ownership of businesses and marketplace competition

The government is concerned about its people and takes care of those who cannot care for themselves

The political system is a democracy with leaders elected by the people

The United States and Japan are examples of a Capitalist Economy

Socialism Increased government involvement in

people’s lives and the economy The main goal is to keep prices low for

all people and to provide employment for many

The government runs key industries and makes economic decisions

More social services for all and free or low cost medical care

Canada, Germany, Sweden, Australia and Great Britain are all examples of socialist economies

Communism The government runs everything

(Totalitarian government) Only one political party, runs the

government All people able to work are assigned jobs

– there is virtually no unemployment The government assigns housing, schools,

and occupations There is little to no economic freedom (no

choices) Cuba, North Korea, and China are

examples

Mixed Economies

The are almost no purely market or purely command economies today

The United States has a mixed economy Democratic political process and a capitalist

economy, but with some gov’t interference

China is also a mixed economy Communist political process and a socialist

economy, but allowing more free enterprise & consumer choices

REVIEW ASSESSMENT1) List and describe each of the 4 factors of production.

2) What are the 3 basic economic questions every society answers? (write out complete question, not just one word)(write out complete question, not just one word)

3) What are the 4 specific types of economic systems that exist in the world today?

4) Describe each of these 4 economic systems.

5) What are the 3 different types of business organizations in the US?