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
 The Factors of Production

Human
Human
Natural
Natural Capital
Capital

Product
Product

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 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 societys 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.