ECONOMIC SYSTEMS

Human wants are

unlimited,

but resources are

not.

ECONOMIC SYSTEM

An economy, or economic system, is the way a nation makes economic choices about how the nation will use its resources to produce and distribute goods and services.

Resources, also called factors of

production, are all the things used in

producing goods and services.

The basic resources available to a

society are:

•Natural

•Human

•Capital

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The Factors of Production

Product

Natural

Human

Capital

• Natural refers to everything on

Earth that is in its natural state, or

Earth's natural resources.

• Human refers to all the people who

work in the economy.

• Capital refers to the things that are

themselves produced and then used

to produce other goods and

services. Examples: tools,

equipment, computers, desks, trucks,

buildings

THREE ECONOMIC QUESTIONS

All economies must answer three

questions:

1. What goods and services will be

produced?

2. How will they be produced?

3. For whom will they be produced?

The Economic Problem

Given scarce resources, how do

societies answer the three basic

economic questions?

Every society has some

system that transforms

that society’s scarce

resources into useful

goods and services.

THREE ECONOMIC SYSTEMS

• Traditional Economy

• Command Economy

• Market Economy

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STANDARDS USED TO DISTINGUISH

ECONOMIC SYSTEMS

Some standards used to distinguish

among economic systems are:

• Who owns the resources?

• What decision-making process is used to

allocate resources and products?

• What types of incentives guide economic

decision makers?

TRADITIONAL ECONOMY

In a traditional economy, goods and services are produced by the family for their personal consumption.

A traditional economy is shaped largely by custom or religion.

TRADITIONAL ECONOMY

In a traditional economy, resources are

allocated according to long-lived practices

from the past. There is little surplus

(something extra) and little trade (or

exchange of goods).

TRADITIONAL ECONOMY

In a traditional economy, there is only a

limited need for markets (places to buy and

sell goods and services).

TRADITIONAL ECONOMY

A traditional economy is the type of

economy found in less developed nations,

usually in rural areas.

COMMAND ECONOMY

In a command economy, all resources

are collectively owned and directed by

the government.

In a command economy, the

government decides what and how

much to produce.

In a command economy, the government

answers the three basic economic questions:

1. What? A dictator or a central planning

committee decides what products are needed.

2. How? Since the government owns all

means of production in a command economy,

it decides how goods and services will be

produced.

3. For whom? The government decides who will

get what is produced in a command economy.

COMMAND ECONOMY

In a command economy, the government

decides where to locate economic

activities.

COMMAND ECONOMY

In a command economy, the government

decides what prices to charge for goods,

including agricultural goods and services.

COMMAND ECONOMY

In a command economy, economic

decisions are often made to further the

goals of the government.

COMMAND ECONOMY

In a command economy, production

costs (how much it costs to make an

item), are not reflected in the cost of the

item.

For example, in a command economy it

might cost $2.00 to produce a loaf of

bread, but the price might be set at $1.00

in order to ensure that customers are

able to afford adequate food.

COMMAND ECONOMY

In a command economy, the price might

be set higher than the production costs.

For example, in a command economy it

might cost $5,000.00 to produce a car,

but the price might be set at $10,000.00

in order to ensure that only the wealthy

can buy it.

Market Economy

(free enterprise, capitalism)

Individual producers must figure out how to

plan, organize, and coordinate the

production of products and services.

In a market economy, resources are

allocated through individual decision making.

MARKET ECONOMY(FREE ENTERPRISE, CAPITALISM)

• In a free-market country, people can own

their own businesses and property.

People can also buy services for private

use, such as healthcare.

(But most capitalist governments also

provide their own education, health and

welfare services. )

MARKET ECONOMY(FREE ENTERPRISE, CAPITALISM)

• In a market economy, prices act as signals of

scarcity. When the price of something is

high, that means it's more scarce. Demand

for it is high relative to the supply.

MARKET ECONOMY(FREE ENTERPRISE, CAPITALISM)

• When the price of something is low, then

it's less scarce. By observing prices,

consumers and producers can choose

their behavior to respond to scarcity.

MARKET ECONOMY(FREE ENTERPRISE, CAPITALISM)

• High prices encourage producers to switch

from more scarce to less scarce resources,

and they encourage consumers to switch

from products and services that require more

scarce resources to products and services

that require fewer scarce resources.