What Is an Economy?

Traditional Economy
• System where societies
make economic
decisions based on
family, tribe, or clan
customs and beliefs.
• Men and Women have
set roles
• Men- hunt and herd
• Women- farm and take
care of kids
Found in rural, under-developed countries–
Pygmies of Congo
Eskimos & Indian tribes
Advantages and Disadvantages of
Traditional Economy
• Advantage- answers the three essential
economic questions, What- enough to survive,
How- follows tradition, For Whom- divided up
through tradition
• Disadvantage- Systems are not changed, leads
to less productivity. People are born into their
role, lower standard of living
Command Economy
• Gov’t decides what,
how, and for whom to
• Gov’t decides how to
satisfy wants and
needs of the
• Basically, they control
all aspects of
Section 2- Command Economics
• Gov’t decides what and how
a good or service should be
• They determine wages,
economic roles, and they
make all decisions.
• They even tell you who can
operate a business and how
much they can sell a month
Command Economy
• The government (or central • Advantages
authority) determines what,
– Guarantees equal standard
how, and for whom goods
of living for everyone
and services are produced.
– Less crime and poverty
• Two types:
– Needs are provided for
– Strong Command – where
government makes all
decisions (communism –
China, Cuba)
– Moderate Command –
where some form of private
enterprise exists but the
state owns major resources
(socialism – France and
through the government
• Disadvantages
– Minimal choices
– Fewer choices of items
– No incentive to produce
better product or engage in
• Also known as a Planned or
Managed Economy
Socialism and Communism
• These political systems
are the best ex. of
command economies
• Both were influenced
by the historian and
economist Karl Marx
What Is an Economy?
Communist countries have a totalitarian
form of government; this means that the
government runs everything and makes all
Theoretically, there is no unemployment in
communist countries.
The government decides the type of
schooling people will receive and also tells
them where to live.
What Is an Economy?
The main goal of socialism is to keep prices
low for all people and to provide employment
for many. The government runs key industries,
generally in telecommunications, mining,
transportation, and banking. Socialist countries
tend to have more social services.
Advantages and Disadvantages
• Provide for sick and elderly
• Disadvantages- Central gov’t
does not understand “local”
• No private property, leads to
lack of motivation to use
resources wisely
• Prices are set, leads to
• No individual rights
Market Economy (Free Enterprise)
• Supply and demand of
• Also called a Free Market
goods and services
Economy or Free Enterprise
determine what is produced
and the price that will be
• Decisions are made
according to law of supply &
Section 1- Market Economies
• Market Economies revolve around people
making decisions in their own self interest
• Private Property Rights and ownership enable
• Private Property Rights- rights to groups and
individuals who own property
• Ex. Factories, offices, clothes, music
• Individuals in a market economy act in their
own self interest when making economic
• Producers make goods and services to make
as much profit as possible
What Is an Economy?
Capitalism features private ownership of
businesses and marketplace competition.
It is the same as a free enterprise system.
The political system most frequently
associated with capitalism is democracy.
Market Economies Include Limited Gov’t
• All four factors of production are privately
owned. Capitalism
• Most Economies including ours, has limited
gov’t involvement
• Purest of capitalism is laissez faire, no gov’t
involvement in the market place
• It does not exist in the real world
Advantages and Disadvantages of Market
AdvantagesEconomic and political freedom
Ability to make as much profit as possible
DisadvantagesThey only invest in profit
No military or social service spending
Unable to work=no help Just rich and poor
wage gap
Section 1- Mixed Economies
• Most nations are a mix of
traditional, command, and
market economies
• Ex. U.S., gov’t protects
consumers and regulates
some areas of business
• Even command economies
have mixed elements ex.
• U.S. is more of a market system, contains
private ownership and markets
• European nations economies are more mixed
than ours
• European nations own key parts of their
industry and in turn provide free healthcare
and social assistance
What Is an Economy?
Continuum of Economic Systems
When studying different economic systems, it is best to view them
on a continuum, as depicted here. Where on the continuum would
you place the United States? Canada? North Korea? What do you
think is the most effective economic system?
What Is an Economy?
Economies in Transition
Many countries are in transition from either
communism or socialism to capitalism.
Privatization is a common aspect of transition
from a command economy to free enterprise
system. Privatization means state-owned
industries are sold to private individuals
and companies.
Fall of Communism=Free Markets in
Eastern Europe
• Eastern Europe use to be under communist
rule and Soviet influence
• Early 90’s Soviet Empire falls and eastern
European nations begin to use market
economics slowly
Two Trends In Moving Towards Mixed
• 1. Changes in Ownership• These nations use to nationalize industry,
gov’t owned and operated
• Now these former command economies have
moved toward privatization- individually
owned by a person or group.
• This creates more efficiency and motivation to
use resources wisely
2. Increasing Global Ties
• Globalization or Global Economy- opening
your market and other to foreign investment
• Ex. U.S. and China
Reasons for Globalized Economies
• Nations are investing in each other’s markets,
stocks, bonds, etc. due to better
telecommunications (internet and world wide
• Technological advancements in transportation
of goods
Economic Goals
Economic Efficiency (max value, min waste)
Economic Equity (fairness)
Economic Freedom
Full Employment
Economic Growth (GDP, health, literacy, . . .)
Security (defense, safety net)
Price Stability
Goals are not necessarily mutually compatible!
ELM 2: Opportunity Cost
Characteristics of Free Enterprise
Several key characteristics make up the basic
principles of free enterprise.
1. Economic Freedom
People may choose their jobs, employers,
and how to spend their money. Businesses
may choose what products to sell and how
much to charge for them.
4. Profit Motive
The drive for the improvement of
material well-being.
2. Voluntary exchange
The right to decide what and when you
want to buy and sell a product.
3. Private property rights
The right to control your possessions as
you wish.
5. Competition
Producers and sellers compete
with one another to attract
consumers, while lowering
costs. Consumers compete
with one another to obtain the
best products at the lowest
Roles of Consumers and Producers in
Market Economies
• Consumer- spend money
as they wish, enter into
business with who they
want, and buy work and
services of others
• Producers- Decide what
goods and services to sell
and use limited resources
to make as much money as
American Free Enterprise
• The Role of the Consumer:
– The fundamental purpose of the free enterprise system is to give
consumers the freedom to make their own economic choices.
– Consumers make their desires known through their economic
dealings with producers.
– When consumers buy products, they signal to producers to
produce more of that particular item.
– Consumers can also make their wishes known by joining interest
groups – private organizations that tries to persuade public
officials to act or vote according to the members’ wishes.
– Usually form around issues like taxation, aid for farmers, and land
Role of Government
• Protector: enforces laws against
– False and misleading advertising
– Unsafe food and drugs
– Environmental hazards
– Discrimination
Provider: all levels of government provides goods
and services for citizens.
-national defense, funds for road construction
-education systems, parks, libraries, sanitation, etc..
Roles of the Government cont….
• Regulator
• -preserving competition in the marketplace
• -regulates the following industries
– Banking, nuclear power, communications
Consumer: All levels of government consume
resources to fulfill their over roles in the economy.

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