Economic Systems
The Three Economic Questions
And
The Four Economic Systems
Every society must answer three
economic questions:
• What goods and services should be
produced?
• How should these goods and
services be produced?
• Who consumes these goods and
services?
Four Economic Systems
Traditional
Command
Market
Mixed
Traditional Economic System: Ritual,
Habit, and Custom
The basic economic questions are answered:
by doing things the way they have always
been done.
Advantages
Sets forth certain economic roles for all members of
the community
Stable, predictable, and continuous life
Revolves around family
Communities stay relatively close and small
Disadvantages
Discourages new ideas,
new technology, and new
ways of doing things
Stagnation and lack of
progress
Lower standard of living –
lack modern conveniences
Have few mechanisms in
place to deal with
disasters such as floods,
drought
Command or Centrally Planned
Economic System
Basic economic questions of
what, how and for whom
to produce are answered:
by a central planning
authority.
Advantages
Central authority is in command of the economy
Capable of dramatic change in a short time
Little uncertainty over choice of career, where to
work, or losing job
Many basic education, public health, and other
public services available at little or no cost
Disadvantages
Does not meet wants and needs of
consumers
Lacks effective incentives to get
people to work
Requires large bureaucracy, which
consumes resources
New and different ideas
discouraged, no room for
individuality
Problems of a Centrally Planned Economy
Centrally planned economies face problems of
poor-quality goods, shortages, and diminishing
production.
Market Economic System:
(Free Market, Capitalism)
Buyers and Sellers: Dollars “Vote”
The Basic economic questions are answered: by having
buyers and sellers make economic decisions.
Advantages
Overtime, can adjust to change
Individual freedom for
everyone
Little government interference
Decentralized – not
concentrated in the hands of a
few
Variety of goods and services
High degree of consumer
satisfaction
Disadvantages
Rewards only productive
resources; does not
provide for people too
young, too, old, or too sick
to work
Workers/businesses face
uncertainty as a result of
competition and change: no
guarantee for job
Does not produce enough
public goods such as
defense, universal
education, or health care
Mixed Economic System
The basic economic questions are answered:
by combining traditional, state-run, and
private enterprises.
Mixed Economic System: No real
disadvantages
A combination a traditional, market, and command
economies.
Need government intervention – create laws
protecting property rights and enforcing contracts
Governments provide for national defense, roads and
highway systems, conservation, environmental
protection, education
Key is to balance control and freedom
The degree of government involvement in
the economy varies among nations, and
can affect its society.
Continuum of Mixed Economies
Centrally planned Free market
Iran South Africa France United Kingdom Hong Kong
North Korea China Botswana Canada Singapore
Cuba Russia Greece Peru United States
Essential Questions/Ideas
How do societies provide the necessary items for their
people?
Who gets to decide?
Which economic system fails to worry about its people’s
wants?
How does each system assign roles to play in the economy?
When should government intervene in the economy?
Which economic system do you think is most beneficial for
everyone?
Why?
