Economic Systems

1-Define the term economic system.

An organized way of providing for the wants and needs of a society’s people.

2-Traditional economies

  • Characteristics

The use of scarce resources and other economic activity stems from ritual, habit or custom

Individuals are not free to make decisions based on what they want or would like to have.

Their roles are defined by the customs of their elders and ancestors.

  • Example

African Mbuti; Australian Aborigines and other indigenous people: Northern Canada’s Inuits: Hunting: share the spoils with other families in even portions: SHARING

  • Advantages

Everyone knows which role to play;

little uncertainty regarding what to produce or how to produce;

for whom to produce is determined by the customs and traditions of the society.

  • Disadvantages

Tends to discourage new ideas or ways of doing things;

strict roles have the effect of punishing people who act differently or break the rules;

lack of progress leads to economic stagnation and a lower standard of living than in other economic systems.

3-Command Economies

Define-

A central authority makes the major decisions about What, How and for whom to produce. Led by king, dictator, or president who make the economic decisions.

  • Characteristics

The government makes the major economic decisions: if houses or apartments will be built, they determine the best way to build them and who will receive them.

Severely limit property rights; people not allowed to own their own homes, businesses and other productive resources [some personal items and tools are permitted.

Individual freedom limited: government decides what its universities should teach; goverment tends to favor themselves when making economic decisions: favored with luxury goods for themselves, not their people,

  • Examples

North Korea; Cuba; USSR

  • Advantages

Can change direction drastically,

Many health and public services are available at little or no cost.

  • Disadvantages

Ignores basic wants and needs of consumers; gives people incentive to fill quotas in production rather than producing a good product.

Requires a large decision-making bureaucracy,

The planning bureaucracy lacks the flexibility to deal with minor day-to-day problems;

Rewards for individuals are rare

4-Market economies

Define-

People make decisions in their own best interest. A market is an arrangement that allows buyers and sellers to come together to exchange goods and services

  • Characteristics

A great deal of freedom: people spend their money on products they want most.

This tells producers what products people want; businesses are free to find the best production methods; income that consumers earn and spend in the market determines for Whom to produce; private ownership of resources;

Based on capitalism: en economic system where private citizens own the factors of production

  • Examples

US, Japan, South Korea; Singapore; Australia; Great Britain and parts of Western Europe.

  • Advantages

High degree of individual freedom;

adjusts to change gradually over time;

relatively little government interference;

decision-making decentralized;

variety of goods and services;

high degree of customer satisfaction.

  • Disadvantages

Does not provide for everyone, may be difficult for some people to survive; may not provide enough of some basic goods and services; high degree of uncertainty.

5-Mixed economies

Define-

Economic system that combines the elements of all three types: Traditional, Command and Market economies

  • Characteristics

Some have a political system based on democracy; some do not

Some government provide only for basic needs: defense, justice system, universal education

The more socialistic a country is, the more it will make major economic decisions.

  • Examples

China: mixture of traditional, command and market economies; recently, government has allowed some private ownership of resources and capitalism is increasing.

Norway: government owns the petroleum industry: uses revenue from oil to keep gas prices low; finance education; maintain roads and provide social welfare to its citizens.

  • Advantages

Provides assistance for people otherwise left out

If society has democracy, voters can use electoral power to affect what, how and for whom decisions.

  • Disadvantages

Costs for benefits can be high

Availability of services may be limited or the quality may deteriorate over time

May be less efficient than capitalism.