What are the 3 main

questions???

What are the 3 main questions???

1. What goods/ services should be produced?

2. How should they be produced?

3. For whom should they be produced?

Types of Economic SystemsThere are 4 systems that differ based on how they answer the 3 basic questions

(what, how, for whom to produce)

Trdn Cmnd Mrk Mxd The traditional commander

made his mark with his mix

Traditional Economy: system in which economic decisions are based on customs & beliefs that have been handed down from generation to generation

• “Things are done the way they always have been done”• Economic decisions are based on customs & beliefs

handed from generation to generation• If your father was a fisherman, you would be a

fisherman, your son would be a fisherman, etc…

Traditional Economy…• ADVANTAGES– You know what’s expected of you– Family/ community ties are very strong

• DISADVANTAGES– Change is discouraged & even punished– Choices among consumer goods are rare– Rare increase in the level of material well-being– Things tend to stay the same

In Australia, Aboriginal tribes/ civilizations are traditional economies

Command Economy: system in which the gov’t controls the factors of production & makes all

decisions about their use

• Also known as a “controlled system”• Decisions in gov’t are made by leaders only• One leader, small group of leaders, group of central planners• Leaders control all facets of the factors of production (LALAgsCAP’EN)• You get paid what your leader decides & you may not be able to

choose your own career

Command Economy…• DISADVANTAGES– Lack of incentives to work hard since gov’t set

workers’ salaries– Little/ no room of “moving up”– Lack of consumer choices

North Korea is a command economy – all economic activity is gov’t planned

Market Economy: system in which individuals own the factors of production & make economic decisions

through free interaction while looking out for their own & their families’ best interests

• Also known as “capitalism”• Opposite of a command economy• Limited gov’t makes it possible

for individuals to make their own economic decisions

• Individuals control all facets of production (LALAgsCAP’EN)

• These decisions are guided by market prices

Market Economy…. MARKETS:• Market: process of freely exchanging goods & services

between buyers & sellers– Voluntary exchange– Worldwide – oil– Local – babysitting/ snow shoveling

• High priced goods = relatively scarce product• Low priced goods = relatively plentiful product• *Prices can fluctuate between high & low – this results in an

incentive-driven system*

Market Economy…

• ADVANTAGES– Freedoms: choose career, spend freely,

own property, take risks, earn profits– Competition allows for a HUGE array of

goods & services to pick from• DISADVANTAGES– Too old/ too young/ too sick are pushed out of the system & rely on charity or hand-outs

Market Economy…Circular Flow of Income/ Output

• Circular flow of income & output: economic model that pictures income as flowing continuously between businesses & consumers

The flow of resources, goods & services, & income is circular

Circular flow of income & output– Dollars flow from businesses to individuals & back to businesses– Factors of production flow from individuals to businesses, which use

them to produce goods & services that flow back to the individuals

Mixed Economy: system combining characteristics of more than one type of

economy (market & command)• Most countries in the world have a

mixed economy• Private ownership of property &

individual decision making are combined with gov’t intervention & regulations– United States

• most decisions are made by individuals within the market

• BUT federal, state & local gov’ts make laws protecting private property & regulating areas of business

I own my own business &

control everything

BUT need to follow

business regulations

Your Turn….Come up with a memory device….

How can you (we) remember the following:- 4 types of systems: traditional, command, market, mixed- We’ll vote on the best…. That person gets 5 smackers!!!

Circular flow of income & output– Dollars flow from businesses to individuals & back to businesses– Factors of production flow from individuals to businesses, which use

them to produce goods & services that flow back to the individuals

Major Economic Systems (you’ll see this again… do it right!)

Type of system Who makes decisions based on the basic 3

questions?

Advantages Disadvantages

Traditional

Command

Market

Mixed