Chapter 2 Economic Systems (2024)

CHAPTER 2
ECONOMIC SYSTEMS
“Introduction to Economic Systems”

Critical Questions
• What key economic questions must every
society answer?
• What basic economic goals do societies
have?
• What types of economic systems exist
today?
What is an economic system?
The method used by a
society to produce and
distribute goods and
services
The Three Questions that Determine
a Societies Economic System
Because ALL economic resources are scarce,
every society must answer three questions:
– What goods and services should be
produced?
• Guns or butter?
– How should these goods and
services be produced?
• What combination of factor
resources should we use?
– Who consumes these goods and
services?
• How will income be distributed?
• Every society has some system or

mechanism that transforms that society’s
scarce resources into useful goods and
services.
Economic Systems
An economic system is a pattern of organization,
which is aimed at solving the three central economic
questions of what to produce, how to produce and for
whom to produce.
There are three distinct economic systems:
 Traditional  Command
 Market
The fourth system has a combination of features of
these three distinct systems, and it is referred to as:
 mixed economic system.
Four Economic Systems

An economic system is the method used by a society
to produce and distribute goods and services.
Traditional economies rely on habit, custom, or ritual to

decide what to produce, how to produce it, and to whom to
distribute it.
In a centrally planned economy, the central government

makes all decisions about the production and consumption of
goods and services.
In a market economy, economic decisions are made by
individuals and are based on exchange, or trade.
Mixed economies are systems that combine tradition and the

free market with limited government intervention.
Comparing Economic Systems
Economic System Who answers the 3 ?’s
• Traditional • Customs
• Market • Individuals
• Command • Central Government
• Mixed • Individuals with some
government
involvement
Traditional System
• A traditional system relies on habit,
custom or ritual to decide what to
produce, how to produce it and to
who to distribute it.
• Agricultural and hunting societies
• There is little room for innovation or
change.
• They tend to lack modern conveniences
and have a low standard of living.
• Close knit communities with focus on the
family unit.
Traditional Economy
• Found in rural, • Farming, hunting and
underdeveloped gathering are done the
countries– same way as the
– Vanuatu generation before
– Pygmies of Congo • Economic activities are
– Eskimos & Indian tribes centred around the family
– Belarus or ethnic unit.
• Customs govern the • Men and women are given
economic decisions different economic roles,
that are made. and tasks
• Advantages: people A market is an
have specific roles;
security in the way arrangement that
things are done allows buyers and
• Disadvantages:
Technology is not
sellers to
used; difficult to
improve
Why Do Markets Exist?
Markets exist because none of us produces
all the goods and services we require to
satisfy our needs and wants.
exchange goods efforts of
and services. individuals and
Specialization is firms on a limited
the concentration number of
of the productive activities.
Advantages of the
Economic Efficiency Market
• As a self-regulating markets encourage
system, a free growth.
market economy is Economic Freedom
efficient. • Free market economies
Economic Growth have the highest degree of
• Because economic freedom of any
competition economic system.
encourages Additional Goals
innovation, free
• Free markets offer a • Businesses and consumers
wider variety of decide what they will
goods and services produce and purchase and
than any other in • what quantities
economic system. • Decisions are made
Market Economy (Free

Enterprise)
• Also called a Free according to law of supply
Market • •
Economy or Free & demand
Enterprise Supply and demand of goods
Economy and services determine what is
produced and the price Advantage—competition to
that will be charged. have the best products and
services Disadvantage—huge
rift between wealthy and poor
• Note: a true market economy does not exist.
Command Economies
The
government,or
central authority
controls the
economy.
Organization of Command Economies
In a command economy, the government owns
both land and capital. The government
decides what to produce, how much to produce,
and how much to
Socialism is a social
and political philosophy Communism is a political
based on the belief system characterized by a
that democratic means centrally planned economy with
should be used to all economic and political
distribute wealth power resting in the hands of
evenly throughout a the government. Communist
society. governments are authoritarian
in nature.
charge.
Command Economy
• The government (or central (Swedensocialism )
• authority) determines – France and •
what, how, and for whom Advantages
goods and services are
– Guarantees equal
produced. standard of living for
• Two types: everyone
– Strong Command – where – Less crime and
government makes all • poverty
decisions (communism – – Needs are provided
China, Cuba, North Korea) for through the
– Moderate Command – government
where some form of private Disadvantages
enterprise exists but the
state owns major resources – Minimal choices
– Fewer choices of items Also known as a Planned
– No incentive to produce or
better product or engage in Managed Economy
entrepreneurship.
The Soviet Experiment

• Land, labour and capital were all controlled
by the state. The best resources were
allocated to the armed forces, space
program, and production of capital goods.
• Government committees decided the
quantity, process, and distribution of all
products.
• The government created large state-owned
farms and collectives to produce all
agricultural products.
• Under this system there was little incentive
to produce, and the Soviet Union saw a rapid
decline in the production of agricultural
goods.
Command economy
face problems of poor-
quality goods,
shortages, and
diminishing production.
Other Problems in Centrally
Planned Economies
• Performance falls short of the set ideals
• Fail to meet consumer needs and wants
• Little individual incentives to work hard
• Lack of improvement
• Expensive and inflexible government
structure needed to manage the system
• Sacrifice of individual freedoms to pursue
societal goals.
Mixed
Economies
•It is doubtable that any
nation can exist
successfully under a pure command
economy or a pure market economy.
•Most economies mix features of both
systems.
Mixed Economy
Combination of a Most nations have a
market and a mixed economy: United
States, England,
command economy
Australia, South Africa
 Government takes
Advantage —balance of
care of people’s needs.
needs and wants met by
• Marketplace takes government and in
care of people’s wants. marketplace
• Disadvantage —citizens
have to pay taxes
An economic system that permits the conduct of business with
minimal government intervention is called free enterprise. The
degree of
government involvement in the economy varies among nations.
Nations are placed on a continuum (a range with no clear divisions)
of mixed economies. On one end are centrally planned economies
and on the opposite end are free markets economies.
Continuum of Mixed Economies
Centrally planned Free marke

Iran South Africa France United Kingdom Hong Kong
North Korea China Botswana Canada Singapore CubaRussia Greece Peru

United States
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Comparing Mixed Economies
Men behind the systems
Economic systems evolve over time and are
shaped by a variety of economic, political,
social, cultural, and social influences amongst
others. The ideas of these three economists
helped to shape various economic systems:
• Adam Smith (1723-1790)
• Karl Marx (1818-1883)
• John Maynard Keynes (1883-1946)
THE END

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Chapter 2 Economic Systems (2024)

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CHAPTER 2

“Introduction to Economic Systems”

• Every society has some system or

Four Economic Systems

Traditional economies rely on habit, custom, or ritual to

In a centrally planned economy, the central government

Mixed economies are systems that combine tradition and the

Market Economy (Free

The Soviet Experiment

Centrally planned Free marke

North Korea China Botswana Canada Singapore CubaRussia Greece Peru

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