1. Economic
Systems

2. Economic Systems
 An economic system describes how a
country’s economy is organized
 Because of the problem of scarcity, every
country needs a system to determine how to use
its productive resources
 Scarcity = not having enough of something
 An economic system must answer 3
questions…

3. The 3 Economic Questions (3E?’s)
1. WHAT TO PRODUCE? (What kinds of goods and
services should be produced?)
2. HOW TO PRODUCE? (What productive resources are
used to produce goods and services?)
3. FOR WHOM TO PRODUCE? (Who gets to have the
goods and services?

4. Three Types of Economic
Systems:
 1. Traditional Economy
 2. Command Economy
 3. Market Economy
 * Most countries are… Mixed Economies!
(Market + Command)

5. Traditional Economy
 An economic system in which economic
decisions are based on customs and beliefs
 People will make what they always made &
will do the same work their parents did
 Exchange of goods is done through
Bartering: trading without using money

6. How a Traditional Economy
answers the 3E?’s
 Who decides what to produce?
 People follow their customs and make what
their ancestors made
 Who decides how to produce goods &
services?
 People grow & make things the same way that
their ancestors did
 Who are the goods & services produced
for?
 People in the village who need them

7. Traditional Economy
 Examples:
 Villages in Africa and South America
 the Inuit tribes in Canada
 the caste system in parts of rural India
 the Aborigines in Australia

8. Positives of a
traditional economy
 Predictable
 Knowing what your job will
be
 Knowing the way you will
live

9. Problems with a
traditional economy
Lack many resources
Only produce enough to
live on

10. Command System
 Government makes all economic decisions &
owns most of the property
 Governmental planning groups determine such
things as the prices of goods/services & the wages
of workers
 This system has not been very successful & more
and more countries are abandoning it

11. How a Command Economy
answers the 3E?’s
 Who decides what to produce?
 Government makes all economic decisions
 Who decides how to produce goods
and services?
 Government decides how to make
goods/services
 Who are the goods and services
produced for?
 Whoever the government decides to give them
to

12. Command System
 Countries with communist governments have
Command economies
 Examples: There are no truly pure command
economic systems, but close countries are:
North Korea, former Soviet Union, Cuba
*Germany and Russia have moved away from
having a Command economy since 1991. Now they
have a Mixed economy.

13. Positives of a
command economy
 Because the government
makes the decisions, people
don’t have to worry about
employment, housing,
education, and healthcare

14. Problems with a
command economy
 Consumers get low
priority
 Little freedom of choice
 All resources are owned
by the government

15. Market Economy
 An economic system in which production
and distribution questions are answered by
prices and profits (supply and demand)
 Most of the resources are owned by private
citizens
 Economic decisions are based on Free
Enterprise (competition between
companies)
 Important economic questions are not answered
by gov. but by individuals
 Gov. does not tell a business what goods to
produce or what price to charge

16. How a Market Economy answers
the 3E?’s
 Who decides what to produce?
 Businesses base decisions on supply and demand
and free enterprise (PRICE)
 Who decides how to produce goods
and services?
 Businesses decide how to produce goods
 Who are the goods and services
produced for?
 consumers

17. Market Economy
 There are no truly pure Market economies,
but the United States is close.

18.  In a truly free market economy, the
government would not be involved at all
 There would be no laws to protect workers form
unfair bosses
 There would be no rules to make sure that
credit cards were properly protected
 Many societies have chosen to have some
rules to protect consumers, workers, and
businesses (MIXED)
 These rules reduce the freedoms that businesses
have, but they also protect the workers and
consumers

19. Positives of a
market economy
 People can start their own
businesses
 People have choice

20. Problems with a
market economy
 The desire for money may
lead to poor quality of
goods and services
 Business owners have to
risk losing money

21. Mixed Economy
 Market + Command = Mixed
 There are no pure command or market
economies.
 To some degree, all modern economies exhibit
characteristics of both systems and are often
referred to as mixed economies.
 Most economies are closer to one type of economic
system than another
 Businesses own most resources and determine
what and how to produce, but the
government regulates certain industries

22. How a Mixed Economy answers
the 3E?’s
 Who decides what to produce?
 businesses
 Who decides how to produce goods and
services?
 Businesses, but the government regulates
certain industries
 Who are the goods and services produced
for?
 consumers

23. Mixed Economies
 Most democratic countries fall in this
category (there are no truly pure Market or
Command economies).
 Examples: Brazil, Mexico, Canada, UK, US,
Germany, Russia, Australia, etc.

24. Positives of a Mixed
economy
 Private Ownership of businesses
 Protects citizens/workers with
government regulations
 Protects environment

25. Problems with a Mixed
economy
Government intervention
can prevent profit for
companies

26. Continuum of Economies
Pure Pure
Market Command
Most No
Individual Individual
freedom freedom
Most economies fall in between a pure
market and a pure command economy
on the continuum

27. Economy Continuum
Command Market
Germany UK US
Cuba Russia Australia

28. Which Economic System Is Best?
 Market system has proven to be best
because it promotes the goals of growth,
freedom, & efficiency
 Citizens are free to own their own property and
use it in the most efficient and profitable way
 Command and Traditional systems
sometimes offer more security, but are not
nearly as strong in efficiency, growth,
freedom, and environmental quality