~ Every economy must answer 3 basic questions:
1. WHAT will be produced?
2. HOW will it be produced?
3. FOR WHOM is it being produced?
~ How a society answers those three questions defines its economic system.
4 Major Types
1. Traditional
~ basic questions are answered
by tradition, custom, ritual, and habit
~ economic roles are clearly
defined
~ little personal economic
freedom
~ discouragement of new ideas/innovation
2. Command (Socialism, Communism)
~ central authority (govt.)
answers the basic questions
~ production and resources
are tightly controlled
~ economy can change direction
very quickly (cars to tanks)
~ not designed to meet the
wants of individuals
~ lack of incentives
~
little variation in pay and perhaps too much job security
~ large bureaucracy
~ discouragement of new ideas/innovation
3. Market (free enterprise, capitalism)
~ "the market" answers the
basic questions
~ market = buyers & sellers
~ decisions are motivated
by profit
~ easy to adjust to changing
consumer demands
~ freedom of choice for buyers
~ little govt. control
~
govt. main involvement in economy is to regulate and ensure "fair play"
~ risk involved
~ variety of goods available
for buyers
~ 3 thing that ensure successful
market economy
1.
competition (benefits buyer)
2.
resources (labor) is free to move around
3.
access to information = ability to make informed choices
4. Mixed
~ has components of command/traditional/market
~ most economies are mixed
~
US: mostly a market system, but has elements of traditional and command