Economic Systems Review

Economic Systems Review

Main Ideas

  • An economic system is defined as the method by which a society produces, distributes, and consumes goods and services.

  • The classification of an economic system is determined by the entities responsible for answering the three fundamental economic questions:

    • What to produce?

    • How to produce?

    • For whom to produce?

Traditional Economy

  • The economic questions in a traditional economy are answered by established habits, customs, and traditions that dictate practices passed down through generations.

  • Typically, in this type of economy:

    • Children inherit the occupations of their parents, creating continuity in roles such as farming or hunting and gathering.

  • Examples of traditional economies include:

    • The Inuit tribe

    • The Amish community

    • The Pygmy tribes in Africa

Command Economy

  • In a command economy, the government takes control of answering the basic economic questions.

  • Advantages of command economies include:

    • The capability to respond quickly to crises and emergencies.

    • Provision of resources and services equally across the population.

  • Disadvantages of command economies include:

    • Inefficiencies in production and distribution.

    • Lack of incentives for hard work and creativity among citizens.

  • Notable examples of command economies are:

    • The People's Republic of China

    • Vietnam

    • North Korea

    • The Former Soviet Union

    • Cuba

Free Market Economy

  • In a free market economy, individual buyers and sellers, termed consumers and producers, dictate the answers to economic questions.

  • The concepts of Supply and Demand significantly influence market activities:

    • Sellers typically produce goods that buyers are willing to purchase.

  • Motivations in this economy stem from self-interest, with profit being the primary driving force behind economic decisions.

  • This system is also referred to as Free Enterprise or Capitalism.

Mixed Economy

  • A mixed economy integrates aspects of both free market and command economies.

  • Characteristics of a mixed economy include:

    • Government regulation of certain businesses to protect consumers and employees.

    • For example, the government may establish minimum wage laws and regulations surrounding labor conditions and workplace safety.

    • Restrictions on the production and consumption of specific goods and services deemed illegal or unsafe.

    • Provision of social welfare programs such as Medicare, Medicaid, and welfare services aimed at aiding the poor and elderly.

Economic Continuum

  • The economic continuum illustrates different economic systems on a scale from pure command to pure market economies:

    • Pure Command: 0%

    • Mixed Economies (varying percentages) include:

    • United Kingdom: 79%

    • Germany: 71%

    • Russia: 51%

    • Pure Market: 100%

My Pizzeria and Economic Systems

  • Evaluating how my pizzeria could function under different economic systems provides insights into various economic principles.

My Pizzeria in a Free Market

  • In a free market setting, I, as the pizzeria owner, would directly answer the basic economic questions based on customer feedback and purchasing power:

    • Decisions about the quantity of cheese and pepperoni used would be made based on consumer preferences.

    • Quality decisions regarding the ingredients would be based on what would entice customers to return.

    • Employee wages would be determined while considering what they would willingly accept, thereby maximizing my profit margins.

    • I could independently decide on business hours to align with demand.

My Pizzeria in a Command Economy

  • If operating a pizzeria in a command economy, I would not own the business; rather, it would be government-operated, possibly named "The Government’s Pizzeria."

  • The government would answer all fundamental economic questions:

    • It would dictate the quantity of cheese and pepperoni on each pizza produced.

    • It would also determine the quality of ingredients used.

    • Wage structures would be established by the government, eliminating any flexibility on my part.

    • Business hours would likewise be dictated by governmental regulation.

My Pizzeria in a Mixed Economy

  • In a mixed economy, both the government and I would share the responsibility for answering the economic questions regarding the pizzeria:

    • I would decide the quantity of cheese and pepperoni, but the government would stipulate standards for ingredient quality.

    • While I would set wage levels for my employees, the government mandates a minimum wage (e.g., $5.15/hr in Georgia).

    • I would control business operational hours, yet the government would monitor overall safety and fair treatment of employees, potentially influencing my decisions.

Assignment Section

  • Reflect on the different economic systems discussed and articulate your preferences for operating a pizzeria.

    • In a minimum of five sentences, answer the question: Which economic system would you prefer for your pizzeria business (free market, command, or mixed)?

    • Include an explanation of your choice, supported by two reasons for not choosing the other systems.