1. EconomicEconomic
SystemsSystems
UNIT FIVE NOTESUNIT FIVE NOTES

2. Economic SystemsEconomic Systems
 When deciding how to use its limitedWhen deciding how to use its limited
resources, every country answers 3 questionsresources, every country answers 3 questions
about production and distributionabout production and distribution
What will be produced?What will be produced?
How will it be produced?How will it be produced?
For whom will it be produced?For whom will it be produced?
 How a country answers these questionsHow a country answers these questions
depends on the type of economic system theydepends on the type of economic system they
havehave

3. Four Types ofFour Types of
Economic Systems:Economic Systems:
 1. Traditional Economy1. Traditional Economy
 2. Command Economy2. Command Economy
 3. Market Economy3. Market Economy
 4. Mixed Economy4. Mixed Economy

4. Traditional EconomyTraditional Economy
 An economic system in which productionAn economic system in which production
and distribution questions are answeredand distribution questions are answered
by looking to the pastby looking to the past
 People will make what they always made;People will make what they always made;
will do the same work their parents didwill do the same work their parents did
 Economic decisions are made by customsEconomic decisions are made by customs
and beliefsand beliefs
 Example: Inuit; some parts of Africa andExample: Inuit; some parts of Africa and
South AmericaSouth America

5. Command SystemCommand System
 An economic system in which production andAn economic system in which production and
distribution questions are answered by centraldistribution questions are answered by central
planners (government)planners (government)
 Example: North Korea, former Soviet Union, Cuba,Example: North Korea, former Soviet Union, Cuba,
*most Communist countries*most Communist countries
--Germany and Russia have moved away from--Germany and Russia have moved away from
having a Command economy since 1991. Now theyhaving a Command economy since 1991. Now they
have a Mixed economy.have a Mixed economy.
 Economic decisions are made by the governmentEconomic decisions are made by the government

6. Command SystemCommand System
(Cont.)(Cont.) Planners estimate what goods will be neededPlanners estimate what goods will be needed
in the future and work backward to decidein the future and work backward to decide
what materials and workers are needed nowwhat materials and workers are needed now
 Planners can be wrong about future needs,Planners can be wrong about future needs,
and they do not provide people with manyand they do not provide people with many
choiceschoices
 Example: Farming--the government decidedExample: Farming--the government decided
who would be farmers, what they would grow,who would be farmers, what they would grow,
and how much would be turned over to theand how much would be turned over to the
governmentgovernment

7. Market EconomyMarket Economy
 An economic system in which productionAn economic system in which production
and distribution questions are answeredand distribution questions are answered
by prices and profitsby prices and profits
 Economic decisions are based onEconomic decisions are based on FreeFree
EnterpriseEnterprise
 Most Democratic countries have aMost Democratic countries have a
variation of a Market economy & avariation of a Market economy & a
Command economy (Mixed economy)Command economy (Mixed economy)
 There are no truly pure MarketThere are no truly pure Market
economies, but the US and the Unitedeconomies, but the US and the United
Kingdom are closeKingdom are close

8. Market EconomyMarket Economy
(Cont.)(Cont.)
 Businesses will make these products andBusinesses will make these products and
provide those services to earn a profitprovide those services to earn a profit
 Services—in economics, work done forServices—in economics, work done for
others; hotels, restaurants, and doctors allothers; hotels, restaurants, and doctors all
provide servicesprovide services
 Businesses will make things using whateverBusinesses will make things using whatever
materials, labor, and technology earn thematerials, labor, and technology earn the
highest profithighest profit
 Standard of living is higher under a marketStandard of living is higher under a market
system than the others as it often has rapidsystem than the others as it often has rapid
technological changetechnological change

9. Market EconomyMarket Economy
(Cont.)(Cont.) The price of a good depends on how much ofThe price of a good depends on how much of
the good is available and how many peoplethe good is available and how many people
want itwant it
 Producers turn resources into goods andProducers turn resources into goods and
servicesservices
 Resources are raw materials, such as oil,Resources are raw materials, such as oil,
people’s labor, machinery, and mineralspeople’s labor, machinery, and minerals
 Governments can also be producers when theyGovernments can also be producers when they
provide goods such as roads and schools, orprovide goods such as roads and schools, or
when they provide services such as militarywhen they provide services such as military
production or health careproduction or health care

10. Market EconomyMarket Economy
(Cont.)(Cont.)
 Consumers, or buyers, purchase goods andConsumers, or buyers, purchase goods and
servicesservices
 Consumer—a buyer and user of goods and servicesConsumer—a buyer and user of goods and services
 Producers and consumers come together toProducers and consumers come together to
exchange goods and servicesexchange goods and services
 Exchange is giving up one thing in return forExchange is giving up one thing in return for
anotheranother
 In a traditional economy, exchange is most likely toIn a traditional economy, exchange is most likely to
be in the form of barterbe in the form of barter

11. Mixed EconomyMixed Economy
 Individuals own most resources andIndividuals own most resources and
determine what and how to producedetermine what and how to produce
 Government regulates certain industriesGovernment regulates certain industries
 Example: China; most nationsExample: China; most nations
 Market + Command = MixedMarket + Command = Mixed