Lesson 1.4: Economic Systems

Flashcards made from a presentation segment created as a lesson on the structures of economic systems.

Economic system

The system of production, distribution, and consumption used in a society composed of various entities in relationships to address problems like scarcity

Economic system categories

• Traditional

• Market

• Centrally planned (command)

• Mixed

Traditional economy

An economic system where tradition governs decisions, relying on customs that often revolve around a family unit in smaller communities

• Often uses the barter system and only produces what is needed for less surplus

Command economy

An economic system where the government — not individual entities — answers the three key economic questions through control of the factors of production

• Businesses produce goods to provide and not profit

• More concerned with quotas and resource management

• Workers may be allocated in different areas with planned periods

Socialism

A variant of command economy where property is held in common but may be managed by a position of authority, driving toward social equality and wealth redistribution to serve society

• Requires economic power to be controlled by the government or public as a whole to base wealth on contributions to society

Market socialism

A variant of socialism with some free market practices where the means of production are owned by the state or workers in each company, thus sharing profits while mediating production through the market and enabling wealth redistribution

Communism

A command economic system that stands against worker exploitation and wealth accrual, advocating for a centrally planned economy and governmental control of resources

• This opposes capitalism more directly than socialism, which believes in more regulation and reformation within capitalism

Soviet Union

The world’s first communist state from 1917 to 1991; planners allocated the best factors of production to heavy industry and not consumer goods, leading to shortages

China

Another Communist state from 1949 to the late 1970s, starting off with some private farmland but quickly shifting to communal farming communities with sharply flaling farm production

• By the 1970s, this country gave more farmland to private owners, eventually building into more economic freedom overall and their large economic growth

Market economy (capitalist economy)

An economy that runs on markets (the voluntary exchange of goods and services between buyers and sellers) to eliminate the need for self-sufficiency via profit and competition

Specialization

The concentration of the productive efforts of individuals and businesses on a limited number of activities (baking, caring for the sick, manufacturing) for more resource and operational efficiency

Freedom

One of the primary values of market economies, emphasizing the ability to obtain property, maintain employment, and engage in commerce via voluntary exchange

Factor market

A market for the different factors of production primarily involving firms, such as through land leases, worker payments, and bank loans

• The government also participates, employing large numbers of people as public servants

Product market

The arena in which households buy the goods and services firms produce

• Governments may purchase goods and services from private firms

• Other times, governments can provide certain goods and services like public infrastructure, police and fire protection, education, and healthcare

Self-regulation

The idea that a market’s self-interest and competition guide activity within the market as an “invisible hand” without governmental intervention

Self-interest

An idea in market economies that argues that consumers and businesses will settle on optimal pricing via competition for lower prices and higher efficiency

• This can also lead to price gouging, corruption, and cheating, but is ideally held in check by competition

Mixed economy

An economy combining the traits of traditional, command, and market economies to overcome their drawbacks (loss of potential, lack of freedom, and uncontrolled growth, respectively)

• No nation has a pure free market or command economy as a result of the need for governmental intervention — the level of intervention varies from nation to nation to meet economic goals

Laissez-faire

The doctrine that a government generally should not intervene in the marketplace

• Some limited government involvement is necessary, however

Governmental intervention

System where the government intervenes in society; in free markets, this takes various forms:

• Providing infrastructure to enable the market’s function, such as through defense or roads

• Enabling equity and shared benefits, such as through public schools

• Protecting property rights, such as through private property and intellectual property laws

• Ensuring fair market practices, such as through advertising and expansion regulations

• Ensuring the health and safety of citizens, such as through child labor or production laws

United States

A market-based mixed economy where the government intervenes in the economy while enabling the free market through a limited degree of government regulation

• Households can enjoy a high level of economic freedom

• Individuals can choose their work and place to live

• Entrepreneurs can launch and expand businesses in any location

• Banks can operate under fewer restrictions compared to other nations