ES - Economic Systems Lesson
Economic Systems
A country or society’s economic system is determined by how it answers the following three economic questions:
- What goods or services should we produce?
- How should we produce these goods and services?
- For whom will we produce these goods and service?
In a command economy, the government answers all three economic questions with little to no input from anyone else. Market economies exist on the other end of the economic spectrum. Consumers and producers answer these questions with no interference from the government. Most countries use a mixture of these systems commonly called a mixed or mixed market economy. The United States is a mixed market economy. China is too; however, China allows way more government intervention in its economy than the U.S. does. A fourth system, traditional economies, continue to answer the economic questions through habit, ritual, and custom. They produce the same goods and services that their ancestors did.
Characteristics of Economic Systems
| No Private Ownership | No Profit Motive | No Consumer Sovereignty | No Competition | Lots of Regulations |
|---|---|---|---|---|
| The government owns all businesses and property. | Working harder will bring no extra benefits such as a raise. | The government decides what goods are produced. | Businesses do not compete for profit, which leads to lower quality goods and less variety. | The government makes all decisions regarding the economy. There is no individual freedom. |
Command economies are nearly synonymous with communist and totalitarian regimes like Cuba, North Korea, and Syria.
Market Economies
Buyers and sellers decide what to produce, how to produce it, and to whom to distribute it.
| Private Ownership | Profit Motive | Consumer Sovereignty | Competition | Regulations |
|---|---|---|---|---|
| Private individuals and firms (businesses) own ALL the resources. | Buyers and sellers consider their self-interest, or gain personal gain, in each transaction. | Businesses make what consumers want to buy. | Businesses fight for the dollars of consumers, which usually means more choices and higher quality goods. | Self-interest and competition, not the government, regulate the economy. |
Market economies are also known as free enterprise or capitalist economies. No countries have pure market economies with no government intervention. An illegal black market is the best example.
Mixed Economies
Buyers, sellers, and the government work together to decide what to produce, how to produce it, and for whom to produce it.
| Private Ownership | Profit Motive | Consumer Sovereignty | Competition | Regulations |
|---|---|---|---|---|
| Individuals can own property and business, while the government provides public goods like roads, schools, etc. | Like in a market, buyers and sellers are allowed to engage in transactions for personal gain. | Businesses make what consumers want to buy; however, government prohibits the sale of some goods and services. | Like in a market, businesses can struggle for the dollars of consumers. | Government creates laws for businesses to increase safety, health, and competition. |
Most countries have mixed economies. New Zealand has more economic freedom than the United States, which has more economic freedom than a more socialist nation like France.