Chapter 3

ECONOMIC
SYSTEMS

Economic System

An economic system is the method used

by a society / a nation to produce and
distribute goods and services.
Primary goal of an economic system is to
provide people with a minimum standard
of living, or quality of life.

Factors of Production

Economic Resources

Natural Resources raw materials found in

nature that are used to produce goods
Human Resources peoples knowledge,
efforts, and skills used in their work
Capital Resources used to produce goods
and services (buildings, materials, and
equipment)
Entrepreneurial Resources - recognize the
need for new goods or service

Scarcity shortage of resources

The Three Basic Economic

Questions

Because of scarcity each economic system

must answer three basic economic
questions. These questions are:

What to produce?
How to produce?
For whom to produce?

Each economic system answers these

questions in different ways. The way a
nation answers these questions defines
their economy.

Types of Economic Systems

These questions are answered by the type of

economic system a nation has. There are four
types of economies:

Pure Market Economy

Pure Command Economy
Traditional Economy
Mixed Economy

Lets review each of these types of economies.

Traditional Economic
System

Economic system that relies heavily on

habit, custom, or ritual to answer the
three economic questions.
Traditional economies typically focus on
one particular method of livelihood.
Economic roles are often passed from
generation to generation.
Typically found in remote areas around the
world.

Command Economic
System

Economic system where the government

answers the three basic economic
questions.
Command economic systems are
typically found within communist
political systems.
In principle, wealth is shared equally
among all to ensure everyones basic
needs are met

Problems
Consumers get low priority.
Little freedom of choice
few products.
Resources owned by the
state are often wasted
individuals dont care if they
dont own it.

Market Economic System

Economic system where individuals

(consumers/demand) and businesses
(sellers/supply) answer the three basic
economic questions through voluntary
exchange.
Capitalism and free enterprise are terms
that are synonymous with a market
economic system.

Market Economic System

Characterized as encouraging :

Marketplace competition
Private ownership of businesses

Government cares about its people and

tries to take care of those that can not
care for themselves

Although the number of social services

does not match that of a socialist economy

Adam Smith

He is considered to be the father of the

market economic system. He articulated
his ideas in the book Wealth of Nations
(1776).
The primary thesis of Smiths book was
the idea of laissez faire. This means that
the government should not intervene in
the economy. He felt that the economy
should be based upon voluntary
exchange.

Supply (Voluntary
Exchange)

Supply is the willingness of sellers to

produce goods and provide services.
The law of supply tells us that suppliers
are more willing to produce goods and
provide services when they are able to
charge a higher price.

Demand (Voluntary
Exchange)

Demand is the willingness and ability of

consumers to purchase goods and
services.
The law of demand tells us that
consumers are more willing and able to
buy goods and services at lower prices.

Supply and Demand

Equilibrium

The market system is based upon finding

a price where the quantity supplied is
equal to the quantity demanded.
This is called market equilibrium.
When the quantity supplied and the
quantity demanded are not equal this is a
condition called disequilibrium.
The actions of buyers and sellers will
move the market towards equilibrium.

Problems

Difficulty enforcing property rights - no

laws.
Some people have few resources to sell no minimum income.
Some firms try to monopolize markets conspiring and price fixing.
No public goods. - national defense?

Mixed Economic System

All modern economic systems are some

type of mixed system. This means that the
economic system combines elements from
traditional, command, and market systems.
Some economic systems are more heavily
based upon one of the basic forms of
economic systems than the others.
Some government involvement through
mandatory laws and regulations that
businesses follow
Labor Laws, Minimum Wage

Mixed Economic System

More social services to ensure a good

standard of living
The government provides social programs
for those who need help
Medicare, welfare
Taxes are much higher to help finance
government services
Government runs key industries
(telecommunications, natural resources,
transportation and banking)

Continuum of Economic
Systems

Command
Economy
Communism
On the far left

Socialism
Left of
center but
right of
communism

Market
Economy
Capitalism
On the far
right

Example of Economies
Pure
Market
Economy

Mexico

Australia U.S.

Sweden

Russia

Pure
Command
Economy

Mainland North
Korea
China