The Big Three Questions

• Every economic system in the world, past and

present, has to answer these three questions:

• What to produce? (How did economists answer this

question?)

• For whom to produce it?

• How to produce it? (Who owns the factors of

production?)

4 Different Economic Systems

• Traditional

• Command/Socialism

• Capitalism/Market

• Mixed

Traditional Economic System

• Economic system is based on customs and traditions

(handed down from 1 generation to another).

• Allocation of scarce resources stems from ritual, habit, or

customs

• BARTER!! Means trade! No money!

• Examples: Africa, parts of India, the Australian Aborigines

Examples of Traditional Economies

Aborigines

Inuits

Advantages

Disadvantages

• Economic roles are set

• Stable, predictable,

and continuous

• Discourages new

ideas

• Lack of progress

• Lower standard of

living

Does a traditional economy answer the
big three questions?

• What will be produced?

• Whatever tradition, values, and rituals dictate

• How will it be produced?

• However tradition, values, and rituals dictate

• For whom will it be produced?

• Whomever tradition, values and rituals dictate

Command Economy

• A central authority (government)

has to answer the big three
questions

• Government decides the needs of

the people, the best way to produce
it and for everyone!

Command Economy

• There is very little if any input from the
people.

• Examples: North Korea, Cuba, China

Advantages Disadvantages

• Basic Needs taken

care of

• Education, public

health, other services
cost very little if
anything

• Very little

unemployment

• Doesn’t meet wants

• No incentives

• Requires a large

bureaucracy

• New and different

ideas are discouraged

• No room for

individuality

Does a command economy answer the
big three questions?

• What is being produced?

• Whatever the government decides

• How is it being produced?

• The government will tell someone to make it

• For whom is it being produced?

• Whomever the government decides needs it

Capitalism/Market

• System that relies on consumption choices made by

consumers

• Consumers dictate what is produced, how much is

produced, and how much things cost

Capitalism/Market

• Examples: Canada, South Korea, Singapore, Germany,

Great Britain, and the UNITED STATES!

Advantages

Disadvantages

• Individual Freedom for

all

• Lack of government

interference

• Incredible variety to

choose from

• High degree of

consumer satisfaction

• Rewards only productive

people

• Workers and businesses

face uncertainty
(Competition)

• Not enough public goods

(Education, health,
defense)

• Unemployment

• Must guard against market

failure

Answer the big three…

• What will be produced?

• Whatever the consumer wants

• How will it be produced?

• Entrepreneurs will respond to demand

• For whom will it be produced?

• Whomever is willing to work for it (or afford it)

Mixed Economy

• A mix of all of the other three economies

• Some government involvement, consumer driven,

aspects of economy based on traditional values

• This is really what the US is….

• Examples: Obama Care, Bail outs yet consumer

driven. Family owned stores and corporations.