Economic Systems
3 Types of Economic Systems
§ Traditional
§ Command
§ Market/Capitalism
Traditional Economic System
§ People rely on farming and very simple barter trading.
§ Producers and consumers make choices based on what has been done in the past.
§ Often economic decisions are handed down from generation to generation.
§ Example – Farmer
Command Economic System
§ The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the GOVERNMENT.
§ The GOVERNMENT decides what goods will be produced, and how they will be distributed.
§ Is run by a strong centralized government and tends to focus on industrial goods.
§ Benefits
§ Prices are controlled
§ People know how much everything will cost
§ Luxury items are priced high
§ Clothing & Housing low
§ Health care & education provided for free
§ Problems
§ Trying to predict what type of goods people will need
§ Can lead to having too many of one good and not enough of another
Capitalism/Market Economic System
In a market economy, national and state governments play a minor role.
§ CONSUMERS and their buying decisions drive the economy.
§ A market economy is controlled by the forces of supply and demand.
§ Allows business owners to compete in the market with little government control. However, the role of government is important.
Capitalism/Market Economic System
§ Decisions are left to businesses and individuals and the forces of supply and demand to determine what is produced and its value.
§ Example - USA
Market Economy
§ Benefits
§ Consumers can find the goods they need
§ Free to earn enough money as they want
§ Problems
§ Goods and services go up in price
§ If a company does not manage its money well it can go out of business (people loose their jobs & income)
There are no pure free market or pure command economies in the world. All economies are mixed. They fall some where along a continuum as shown above.