This document discusses different types of economic systems and how they answer key questions about what to produce, how to produce it, and who gets to consume it. It contrasts command economies, where the government makes these decisions, with market systems, where private individuals and markets make these decisions. While command economies ensure certain goods are produced, they can lead to shortages and lack innovation. Market systems incentivize innovation but can result in income disparities. Most modern economies, like the U.S., have mixed systems that incorporate some government intervention alongside market forces.

1. Economic Systems
“The more the state "plans" the more difficult
planning becomes for the individual.”
-Friedrich Von Hayek
“The theory of Communism may be summed up in
one sentence: Abolish all private property.”
-Karl Marx
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2. In every economy, several key
questions must be answered
What should we
produce?
Who should
produce it and how
will they do it?
Who gets to
consume it?
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3. These questions are answered by an
economic system
Each of these questions is answered by
the economic system of each country.
An economic system is a set of
institutional arrangements and
mechanisms that are designed to
respond to the economizing problem.
In other words, these systems help us
allocate our scarce resources to
determine what is produced, how it is
produced, and who gets the output!
In some cases,
this system
relies on a
central
government or
authority to
make all these
decisions.
In other
cases, the
market makes
these
decisions.
We’ll cover
this concept
now and
revisit it later
in this
presentation.
Slide 3 of 14
The concept of an
economic systems is a Key
Learning Outcome. These
systems help us decide how
to allocate resources!

4. Economic Systems have
two polar extremes
The Market System involves private
ownership of resources and the use of
markets to direct economic activity. The
government is not the dominant force in
determining what is produced, the
market is.
The polar opposite alternative is a
Command System. It involves
government ownership of resources and
central planning to direct production.
The government is the dominant force in
determining what is produced.
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5. A command economy
There are numerous examples of recent
or current command economies.
1980 China
North Korea
U.S.S.R. Slide 5 of 14

6. There are some advantages of a
Command Economy
• All factors of
production are used
to produce goods
deemed important to
“the state”.
• A planned economy
is typically immune
from the business
cycle.
This allows large projects
to easily be undertaken.
There are few economic “ups and downs”
given that economic activity is directed.
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7. There are also disadvantages
• Shortages. An inaccurate
level of resources could be
allocated to certain goods or
services
• Command systems provide no
incentive for innovation
• Individual desires are
secondary to societal desires
That means people will wait in line!
Why invent something if you won’t reap the rewards!
You may want to be a doctor, but if the state
needs a railroad, you might end up helping to build it!
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8. A classic characteristics of
a command economy: lines
• At the end of the
U.S.S.R.’s existence,
the average soviet
waited in line for 1-2
hours per day.
Source: Schwarz, Barry. Waiting, Exchange, and Power, The
Distribution of Time in Social Systems
• It was estimated that the Soviet population
spent 30 billion hours a year in line.
That is the equivalent of idling 14
million workers a year.
Sold Out
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9. The market system also has advantages
and disadvantages
Advantages:
Production decisions are
made by individuals based
on price signals.
The system gives strong
incentive for innovation.
Proponents would say that this
guy is the best guy at knowing
how many hot dogs to
bring….not a central
government.
If you can invent it and
patent it, it is yours and
you earn the profit from
its sale.
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10. … and disadvantages
Disadvantages:
Income disparity – big
differences in income from
rich to poor often develop.
Social wants and needs are
secondary.
Proponents would say that
those that take the risk
deserve the benefit.
For example, this
system is less capable
of handling
environmental issues.
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11. • One way to measure this is by
reviewing the Economic Freedom
Index
– Published by the Heritage Foundation
– Measures ten factors of economic
freedom including trade, business
conditions and property rights
One key aspect of a capitalist society is that
it has an active but limited government
The U.S. does well in this measure
The higher the score, the more
“Economically free” a country is!
North Korea does not. Slide 11 of 14

12. 2007 Economic Freedom Index
Based on this measure, the U.S. is one of
the most “economically free” countries.
That suggests that the US government is
limited (relatively speaking).
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13. In summary
Societies must answer some fundamental
questions: What is produced, how is it
produced, and who gets to consume it.
These questions are answers with each
society’s economic system.
In some cases, as in a market economy,
individuals are free to make these
decisions on their own.
In other cases, as in a purely command
economy, these decisions are made by a
central authority.
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14. So…Is the U.S. a pure market system?
No, our government intervenes in some cases to correct for
issues that the market may ignore.
A pure market system
would not be interested in
providing food stamps.
A pure market system
would not subsidize public
transit to reduce traffic.
A pure market system
would not care for elderly
that were unable to
provide for themselves.
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