Economic Economic Systems of Systems of

Europe NotesEurope Notes

Economic SystemsEconomic Systems An An economic system economic system describes how a describes how a

country’s economy is organizedcountry’s economy is organized

Because of the problem of Because of the problem of scarcityscarcity, every , every country needs a system to determine country needs a system to determine how to use its productive resourceshow to use its productive resources

An economic system must answer 3 An economic system must answer 3 basic questions…basic questions…

3 Basic questions…3 Basic questions… WHAT TO PRODUCE? WHAT TO PRODUCE? (What kinds of goods and (What kinds of goods and

services should be produced?)services should be produced?)

HOW TO PRODUCE? HOW TO PRODUCE? (What productive resources (What productive resources are used to produce goods and services?)are used to produce goods and services?)

FOR WHOM TO PRODUCE? FOR WHOM TO PRODUCE? (Who gets to have (Who gets to have the goods and services?)the goods and services?)

Four Types of Four Types of Economic Systems:Economic Systems: 1. Traditional Economy1. Traditional Economy

2. Command Economy2. Command Economy

3. Market Economy3. Market Economy

4. Mixed Economy (Market + Command)4. Mixed Economy (Market + Command)

Traditional EconomyTraditional Economy An economic system in which economic An economic system in which economic

decisions are based on customs and decisions are based on customs and beliefsbeliefs

People will make what they always made People will make what they always made & will do the same work their parents did& will do the same work their parents did

Exchange of goods is done through Exchange of goods is done through BarteringBartering: trading without : trading without using moneyusing money

Traditional EconomyTraditional Economy Who decides what to produce?Who decides what to produce?

People follow their customs and make People follow their customs and make what their ancestors madewhat their ancestors made

Who decides how to produce goods & Who decides how to produce goods & services?services? People grow & make things the same way People grow & make things the same way

that their ancestors didthat their ancestors did

Who are the goods & services Who are the goods & services produced for?produced for? People in the village who need themPeople in the village who need them

Traditional Economy Traditional Economy

Examples:Examples: Villages in Africa and South America Villages in Africa and South America the Inuit tribes in Canadathe Inuit tribes in Canada the caste system in parts of rural Indiathe caste system in parts of rural India the Aborigines in Australiathe Aborigines in Australia

Command SystemCommand System Government makes all economic Government makes all economic

decisions & owns most of the propertydecisions & owns most of the property

Governmental planning groups determine Governmental planning groups determine such things as the prices of such things as the prices of goods/services & the wages of workersgoods/services & the wages of workers

This system has not been very successful This system has not been very successful & more and more countries are & more and more countries are abandoning itabandoning it

Command EconomyCommand Economy Who decides what to produce?Who decides what to produce?

Government makes all economic decisionsGovernment makes all economic decisions

Who decides how to produce goods Who decides how to produce goods and services?and services? Government decides how to make Government decides how to make

goods/servicesgoods/services

Who are the goods and services Who are the goods and services produced for?produced for? Whoever the government decides to give Whoever the government decides to give

them tothem to

Command SystemCommand System Countries with communist governments Countries with communist governments

have Command economieshave Command economies Examples: North Korea, former Soviet Examples: North Korea, former Soviet

Union, CubaUnion, Cuba

*Germany and Russia have moved away *Germany and Russia have moved away from having a Command economy since from having a Command economy since 1991. Now they have a Mixed economy.1991. Now they have a Mixed economy.

Market EconomyMarket Economy An economic system in which An economic system in which

production and distribution questions production and distribution questions are answered by prices and profits are answered by prices and profits (supply and demand)(supply and demand)

Most of the resources are owned by Most of the resources are owned by private citizensprivate citizens

Market EconomyMarket Economy

Economic decisions are based on Economic decisions are based on Free EnterpriseFree Enterprise (competition between (competition between companies)companies) Important economic questions are not Important economic questions are not

answered by government, but by answered by government, but by individualsindividuals

Government does not tell a business Government does not tell a business what goods to produce or what price to what goods to produce or what price to charge the consumers.charge the consumers.

Market EconomyMarket Economy Who decides what to produce?Who decides what to produce?

Businesses base decisions on supply and Businesses base decisions on supply and demand and free enterprise (PRICE)demand and free enterprise (PRICE)

Who decides how to produce goods Who decides how to produce goods and services?and services? Businesses decide how to produce goodsBusinesses decide how to produce goods

Who are the goods and services Who are the goods and services produced for?produced for? consumersconsumers

Market EconomyMarket Economy There are no truly pure Market There are no truly pure Market

economies, but the United States is economies, but the United States is close.close.

In a truly free market economy, the In a truly free market economy, the government would not be involved at government would not be involved at allall

There would be no laws to protect There would be no laws to protect workers form unfair bossesworkers form unfair bosses

There would be no rules to make sure There would be no rules to make sure that credit cards were properly protectedthat credit cards were properly protected

Market EconomyMarket Economy

Many societies have chosen to have Many societies have chosen to have some rules to protect consumers, some rules to protect consumers, workers, and businesses (MIXED)workers, and businesses (MIXED)

These rules reduce the freedoms that These rules reduce the freedoms that businesses have, but they also protect businesses have, but they also protect the workers and consumersthe workers and consumers

Market EconomyMarket Economy

Mixed EconomyMixed Economy Market + Command = MixedMarket + Command = Mixed There are no pure command or market There are no pure command or market

economies. economies. To some degree, all modern economies To some degree, all modern economies

exhibit characteristics of both systems and exhibit characteristics of both systems and are often referred to as mixed economies. are often referred to as mixed economies.

Businesses own most resources and Businesses own most resources and determine what and how to produce, but determine what and how to produce, but the government regulates certain the government regulates certain industriesindustries

Mixed EconomyMixed Economy Who decides what to produce?Who decides what to produce?

businessesbusinesses

Who decides how to produce goods Who decides how to produce goods and services?and services? Businesses, but the government regulates Businesses, but the government regulates

certain industriescertain industries

Who are the goods and services Who are the goods and services produced for?produced for? consumersconsumers

Mixed EconomiesMixed Economies Most democratic countries fall in this Most democratic countries fall in this

category (there are no truly pure category (there are no truly pure Market or Command economies).Market or Command economies). Examples: Brazil, Mexico, Canada, UK, Examples: Brazil, Mexico, Canada, UK,

US, Germany, Russia, Australia, etc.US, Germany, Russia, Australia, etc.

Economy Economy ContinuumContinuum

Command Market

Cuba Russia Germany US AustraliaUK

Which Economic System Is Which Economic System Is Best?Best?

Market system has proven to be best Market system has proven to be best because it promotes the goals of growth, because it promotes the goals of growth, freedom, & efficiencyfreedom, & efficiency Citizens are free to own their own property Citizens are free to own their own property

and use it in the most efficient and profitable and use it in the most efficient and profitable wayway

Command and Traditional systems Command and Traditional systems sometimes offer more security, but are not sometimes offer more security, but are not nearly as strong in efficiency, growth, nearly as strong in efficiency, growth, freedom, and environmental qualityfreedom, and environmental quality