Economic Systems Who Makes the Decisions?
Every society has an economic system to allocate goods and services • All economic systems need to answer the 3 economic questions of what to produce, how to produce, and for whom to produce How they answer these questions determines what type of economic system they are: • Traditional • Command • Market economy • Mixed (However no single economy is pure ALL are mixed to come degree…)
Traditional Economies Traditional economies use ritual or custom to answer the basic economic questions Click on pictures
Traditional Advantages • Everyone knows which role to play in the economy. • If you are born into a family or clan of basket weavers you will learn t eave baskets…what to produce is not an issue • You do things the way they have always been done…how to produce has been handed down for perhaps generations • The customs and traditions of your society …for whom to produce is has all ready been predetermined.
Traditional Disadvantages • The main problem is it discourages new ideas. • The strict roles in a traditional society have the effect of punishing people who act differently or want to try something new. • The effect is STAGFLATION (the economy does not grow and the “cost” of goods and services goes up). • Why do you think that leaders in traditional economies discourage or even punish change?
Command Economy Command economies rely on a central authority to make most of the economic decisions
Command Advantages • It can change directions quickly and drastically • The former Soviet Union and China went from agricultural communities to industrial nations in a few decades by using central authority to do so. • During these periods the central authorities could shift the use of resources and allocate (distribute) resources as they saw fit. Current command economies are: North Korea, Cuba, Myanmar, and China (transitioning to market)
Market Economy Advantages • In a pure market economy there is no government involvement in economic decisions. (Adam Smith would approve – laissez-faire). The government lets the market answer three basic economic questions. • Production is left entirely up to individuals and what they decide to produce and consume.. Businesses must be competitive in such an produce products that the consumers wish to purchase. This process is called private enterprise (individuals choose). • In a market economy, the people who have more money are able to buy more goods and services.
Market Economy Disadvantages • A market economy is not equitable. People or individuals are on their own to make a life for themselves. • The American government, as is with most governments, provides “safety nets” such as: welfare, unemployment insurance, etc. to help those that cannot help themselves for whatever reason. • In a market economy non-profit organizations help through private donations and public support • Steve’s story -
Mixed Economy • All economies are a combination or blend of other economic systems. • Can you name what types of economies the United States has?