Economic SystemsWho get to decide what gets produced?

How it gets produced?And who gets to have it?

An economic system…

…is a system which deals with the production, distribution, and consumption of goods and services in a particular society

Economic Realities• Wants > resources = scarcity• Consequences of scarcity

– people must make choices– goods and services must be rationed

All nations must answer 3 basic economic questions:

1. What goods and services should be produced and in what quantity?

EOC study guideBasic Economic

Concepts #4

1. What goods and services should be produced?

• Should a local government use resources to build a new school, repair an old highway, or construct a new recreation center?

• Should American producers use resources to make goods for national defense or to provide services for retired people who are too old or ill to work?

• Should a farmer grow wheat, cotton, or lettuce?

All nations must answer 3 basic economic questions:

1. What goods and services should be produced and in what quantity?

2. How should these products beproduced?

EOC study guideBasic Economic

Concepts #4

2. How should these products be produced?

• How should we obtain crude oil to meet our energy needs?

• How much pollution should we allow firms to generate when producing goods?

• How should hogs be raised before they become food?

All nations must answer 3 basic economic questions:

1. What goods and services should be produced and in what quantity?

2. How should these products beproduced?

3. For whom should these productsbe produced?

EOC study guideBasic Economic

Concepts #4

3. For whom should these products be produced?

• Who should receive the limited supply of flu vaccinations?

• Who should benefit from the construction of a new school?

• Who should a shoe manufacturer market their products toward?

3 Types of Economic Systems

Traditional economy

An economic system that relies on custom or tradition to answer the 3 basic questions

EOC study guideBasic Economic

Concepts #5

Traditional Economies• Economic activity written by past generations

– Produce goods that satisfy basic survival needs• produce little surplus• engage in minimal trade

– Use primitive capital goods--no technology and entrepreneurship

– Rigid division of labor • uses gender, age, and skills to define status and role

in society

EOC study guideBasic Economic

Concepts #5

Amish of Pennsylvania• Past generations determined:

– the main crops are hay, wheat, barley, rye and corn

– crops are harvested using horse-drawn plows– society will voluntarily redistribute wealth to

members who are needy

Mbuti population of northern Zaire• pygmy hunter-

gatherers• live in bands, ranging

from 15 to 60 people. • Mbuti population totals

about 30,000 to 40,000 people

Kavango tribes of Namibia• Kavangos make their

living from fishing, cattle, and the farming of sorghum, millet and maize

• The chief has power over his entire tribe and is responsible for the allocation of land.

• Although the Kavango chiefs are always male, the system is mostly matrilineal

Types of Economic Systems Cont.

Command economy

Traditional economy

An economic system in which the

government dictates the answers to the basic economic questions

An economic system that relies on custom or tradition to answer the 3 basic questions

EOC study guideBasic Economic

Concepts #6

Command Economies• The government or other central authority makes all

economic decisions• Resources are owned by the government• There is no competition; the purpose of business is to

provide goods and services, not to make a profit• Factories are concerned with quotas• The government sets the prices of goods and services• Consumers have few, if any, choices in the market place

EOC study guideBasic Economic

Concepts #6

Old Kingdom in Egypt (2660 BC-2180 BC)• Pharaoh undisputed central

authority• Pharaoh owned all land and

collected taxes from peasants who farmed it

• Peasants required to work on public projects– Canals– Temples– Pyramids– Serve in the army

Soviet Union 1920s-1990s• Communist Party dictated the use of

society’s resources– Central planning authority sets production

levels for almost all products– May redistribute income, usually from

society’s high earners to its low earners– Government controls prices

North Korea• One of the world's last centrally planned

systems– market allocation is sharply limited – mainly in

the rural sector where some peasants sell produce from small private plots

– almost no small businesses

Types of Economic Systems Cont.

Command economy

Traditional economy

Market economy

An economic system in which the government dictates the answers to the basic economic questions

A type of economy that relies on the individuals and businesses to answer the 3 basic questions and manage the factors of production

An economic system that relies on custom or tradition to answer the 3 basic questions

EOC study guideBasic Economic

Concepts #7

Market Economies• Economic decisions are made by individuals

competing to earn profits • Resources are owned by individuals• Profit, not quotas, is the motive for increasing work• Competition determines price and increases the

quality of products• Individual freedom is considered very important;

individuals have freedom to make economic decisions

EOC study guideBasic Economic

Concepts #7

Hong Kong

• A free port that attracted foreign trade and investment

• Offers free markets and profit incentives with few government regulations on business activities

• Hong Kong enjoys the most economic freedom of any economy in the world

Mixed Economies• Combines elements of pure market and command

economies– Government and individuals share the economic decision

making process• Government guides and regulates production of

goods and services• Resources are owned by individuals• Government serves to protect both producers and

consumers from unfair policies and practices

Mixed Economies• Index based on Economic Freedom• Economic freedom start at :47

Three Basic Economics Questions:What to produce?

How to produce?

For whom to produce?