Overview
This lecture covers the different types of economic systems, how societies answer fundamental economic questions, and where the US economy fits on the spectrum between command and market economies.
Fundamental Economic Questions
- Every economy must decide what to produce, how to produce, and how goods are distributed for consumption.
- These questions are answered differently based on the economic system in place.
Types of Economic Systems
Traditional Economy
- Goods are produced primarily for personal consumption; what you make is what you get.
- Examples: rural, agrarian societies in parts of Asia, Africa, and South America.
Command Economy
- Economic decisions are made by the government or a ruling authority.
- The government decides what, how, and for whom goods are produced.
- Example: North Korea is closest to a true command economy.
Market Economy
- Decisions are decentralized; individuals and businesses own resources and make choices to maximize profit.
- What is produced depends on what can be sold profitably.
- Goods go to those willing and able to pay the highest price.
Mixed Economy
- Combines elements of traditional, command, and market economies.
- The US is mostly a market economy but includes command elements (e.g., Social Security, Medicare, regulations).
- Some traditional aspects remain, like home gardening or family childcare.
Economic Freedom & Regulation
- Countries vary in economic freedom from highly free (Singapore, Hong Kong) to low freedom (North Korea, Cuba).
- Even in market economies, government regulations exist (e.g., property protection, consumer safety, contract enforcement).
- No economy is a pure market; all have some regulations (command elements).
Key Terms & Definitions
- Economic System — A framework for answering the fundamental economic questions of what, how, and for whom to produce.
- Traditional Economy — An economy where production is for personal or local consumption, usually agrarian.
- Command Economy — An economy where the government makes all economic decisions.
- Market Economy — An economy based on voluntary exchanges in markets with little government intervention.
- Mixed Economy — An economy blending market, command, and sometimes traditional elements.
- Economic Freedom — The degree to which a country's economy is free from government intervention.
Action Items / Next Steps
- Complete the chapter one quiz and assignment.
- Ask questions on the course discussion board or by email if needed.
- Prepare for chapter two next week.