Basic Economic Systems-“Command vs - Weebly



Basic Economic Systems

“Command vs. Market Economies” Notes

Three Questions an Economic System must answer

1. What goods and services should be produced? This determines how much of each goods and service to produce.

2. How will goods and services be produced? What methods and mix of resources will be used to produce goods and services?

3. For Whom will goods and services be produced?

▪ This is often called the distribution question because it decides which households and individuals will receive goods and services or should the resources be used in other ways?

▪ *These three questions are closely related. The answer to one depends on the answer to others. If one economy distributes equally then will be much diff. than one where individuals make their own decisions (may vary from govt. to govt. on national level, or at state and local level).

• Broad social goals like economic growth and stability are answered in economic systems.

• The institutions and methods a country uses to answer these 3 basic questions determine what kind of economic system exists in the country. The two major types of economic systems are command and market economies.

|Command |Basic Questions |Market |

|A group of central planners base production on politically determined goals. The |What goods and services should be |Consumer preferences, producer costs, and profit considerations determine what to |

|government owns all nonhuman resources. |produced? |produce. |

|There is limited consideration of consumer preferences. They have relatively little| |In other words, the laws of supply and demand determine what and how much of goods |

|influence over economic policy. | |and services are made. The law of supply and demand creates competition among |

|The people who decide are called the bureaucracy. These goals reflect the | |producers. |

|preference of the planners instead of citizens of the state. | | |

|Central planners determine a combination of production resources to be used based on|How will goods and services be produced? |Individual businesses determine the mix of natural, human, and capital resources |

|the country’s goals. | |that will minimize production costs and maximize profits. |

|For example, if the goal is to raise employment, then there will be more emphasis on| |For example, if a business can find a way for 10 people to do the same amount of |

|hiring more people and little regard will be to raise wages. The end result is | |work that 15 were doing, previously, they will let five workers go because that |

|people may be employed while they still remain in poverty. | |will cut down on production costs (wages) |

| | |Therefore, specialization and international trade become important parts of market |

| | |systems. Also, they invest in education and training to promote growth and |

| | |productivity. |

|Wages and other incomes are set by central planners. |For whom will goods and services be |The value of a good or service is determined by buyers and sellers. Buyers vote on|

|In the U.S. there is a modest redistribution of resources through taxes and spending|produced? |what gets produced with their money. Those that spend their money are the ones who|

|programs, but mild compared to other European nations. | |get the goods and services. |

o The United States is a mixture of command and market resources; therefore, it is a Mixed Economy. Most governments in the world are mixed.

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