Understanding Economic Systems and Basic Questions
Economic systems are the foundation of societies, organizing production and distribution of goods. Three basic questions drive economic systems: what goods to produce, how to produce them, and for whom. Traditional, command, and market economies each address these questions differently, relying on custom, government, or market forces. The interplay between political institutions and economic systems is a key aspect of societal organization.
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Aim: What? How? For Whom? Political institutions are a superstructure on an economic foundation. -Vladimir Lenin, 1913
Economic Systems Economic Systems All societies use an economic system. An organized way of providing for the wants The way societies organize organize themselves determine the type have. wants and needs needs of their people. type of economic system they
Basic Economic Questions Basic Economic Questions Three Basic Economic questions that all societies and economic systems attempt to answer. What What goods and services should be produced? How How should the goods be produced? For whom For whom should the goods be produced?
Three Basic Economic Systems Three Basic Economic Systems There are three major kinds of economic systems that attempt to answer the three basic economic questions. Traditional Traditional - an economic system in which decisions about production and consumption are based on custom and tradition Command Command - an economy in which production, investment, prices, and incomes are determined centrally by a government. Market Market - an economy in which decisions regarding investment, production and distribution are based on supply and demand, and prices of goods and services are determined in a free price system.
Basic Economic Basic Economic Questions Questions Traditional Economy Traditional Economy Command Economy Command Economy Market Economy Market Economy What to produce? What to produce? How to produce? How to produce? For whom to produce? For whom to produce?
Basic Economic Basic Economic Questions Questions Traditional Economy Traditional Economy Command Economy Command Economy Market Economy Market Economy By custom By custom whatever was produced in the past was produced in the past whatever The government decides The government decides what should be produced what should be produced The government owns most The government owns most of the means of production of the means of production Consumer choices dictate Consumer choices dictate the success of the success of goods/services goods/services What to produce? What to produce? By custom By custom however items were produced in items were produced in the past the past however The government does the The government does the planning for production: planning for production: factory locations, the factory locations, the occupations of workers and occupations of workers and their salaries their salaries Business leaders choose Business leaders choose the means of production the means of production Their goal is the most Their goal is the most efficient and profitable efficient and profitable methods methods How to produce? How to produce? By custom By custom whoever usually received usually received products will again products will again receive them receive them whoever The government controls the The government controls the distribution system for distribution system for goods/services: housing, goods/services: housing, transportation, consumer transportation, consumer items and sets prices items and sets prices The consumers income The consumers income determines who receives determines who receives which goods/services which goods/services For whom to produce? For whom to produce?
Apply your knowledge: Apply your knowledge: Does the economic system of the United States fit into one of the three basic systems?
Mixed Economy Mixed Economy Most countries have a mixed economy basic economic systems. mixed economy a system that combines elements of all three
Closing Question Closing Question Is a mixed economy more desirable than the other economic systems? Why or why not?
