7. Three economic systems

Economic system is the way that a group, community or nation organizes itself for production.

There are 3 types of economic systems: traditional, market and command ones. Each economic system has its own way to answer basic economic questions.

Traditional economic system: tradition is the only thing that decides what, how and for whom goods and services are to be produced. South America, Africa, Asia are the places we usually find this economic system.

Functions: answer to all basic economic questions => the habit and custom.

- produces goods and services in traditional way

- closed economy, no exchange with other countries.

- rely on agricultural basis, production pattern is unchanged

Command economic system: gov. is the sole decision maker to what, how and for whom goods are produced and distributed. (North Korean, Cuba). Use food stamp system to distribute goods and services to customers.

Market economic system: individual buyers and sellers are those who decide the 3 economic questions. In MES, individuals are the owner of properties, and they are free to pursuit their own interest. Almost everything depends on the market (invisible hand)

- Do market research => consumers’ demand for the product.

- Businesses => reduce their product price => apply new technology, purchase new machines => their production efficient.

- Attract consumers => doing marketing, giving promotion.