Economic systems

1. Economic systems Ways that societies answer WHAT to produce, HOW to produce, and FOR WHOM to produce.

2. Three key systems • Traditional economy • Command economy • Market economy • Each system provides the guidelines for answering the three basic economic questions considering availability of resources.

3. Traditional economy • Why is June a popular month for weddings? • Why are men wearing hats indoors considered to be impolite? • In a traditional economy, habit and custom dictate answers for production within a community. • The Inuit of Alaska and Northern Canada, or Amish communities in various areas still provide examples of traditional economies today.

5. Traditional economy • What is produced? • Continue to hunt, farm, and produce same products/services that have been produced for generations. Inuit hunt, Amish farm and produce furniture and other goods. • How is it produced? • Amish reject modern technologies. Children fall into same occupations as parents. • For whom is it produced? • Largely produced for community, but some goods produced for trade or sale with others to meet needs that may not be met on own.

6. Traditional economy • Advantages: • Everyone knows role • Little uncertainty of WHAT to produce • Little uncertainty of HOW to produce- no new technologies to learn (next year’s system) • Disadvantages: • New ideas discouraged • Strict roles effectively punish those who act differently or break rules • Lack of progress leads to lower standard of living

7. Command economy • Exists when a central authority makes most of the decisions of WHAT, HOW, and FOR WHOM to produce. (Stalin’s 5-year plans; Mao’s land reform policies) • The two most prominent examples of a command economy today is North Korea and Cuba. • Russian and China maintained command economies for most of the 20th century, but both have transitioned toward market economies.

8. Command economy • Advantages: • Direction of the economy can change drastically in a short amount of time. • Many health and public services are available to the populace for little or no cost. • Disadvantages: • Not designed to meet the wants and needs of consumers. • Does not give incentive to work (Academic tests) • Requires large decision making bureaucracy • Does not have the flexibility to handle minor day-to-day problems. • People with unique skills or ideas are often unused.

10. Market economy • Consumers essentially decide WHAT and FOR WHOM questions because their decisions act as votes. • Entreprenuers then will largely decide HOW items will be produced in as efficient manner as possible in order to increase profit margins. • Examples include the United States, Canada, Mexico, Japan, South Korea, Germany, France and Great Britain

11. Market economy • Advantages: • Can adjust to change over time (cars produced during gas crisis; vhs/dvd) • High degree of individual freedom (product/service; occupation) • Relatively small degree of government interference (laissez-faire) • Decision making is de-centralized, not in the hands of the few • Variety of goods and services available • High degree of consumer satisfaction (what if customers complaints are not remedied?)

13. Market economy • Disadvantages: • Does not provide the basic needs for entire population (unemployment numbers) • Does not provide enough of highly valued services (health, education), focused on items to be sold • High degree of uncertainty for workers and business in times of change • Markets can fail if three conditions not met: 1) reasonable competition; 2) resources must remain free to be moved from one activity to another; 3) consumers need access to adequate information for choices (when markets fail, businesses become too large, and some individuals receive incomes not reflective of productivity

14. Economic Spectrum

15. Common uses Command Economy = Communism Mixed Economy = Socialism Market Economy = Capitalism