How do different societies around the world meet their economic needs?
Remember that in life, people have unlimited wants, but limited resources. This is the issue of scarcity. Because of scarcity, we must make choices to determine how we meet our basic needs.
Economics - the study of how people meet their basic needs
Answers three main questions (3MQ):
- What should be produced?
- How should it be produced?
- Who gets what is produced?
Economic system - how a society answers those three questions (how a society meets its needs).
There are four main ways that societies meet their economic needs (in other words, there are four main economic systems). We will take a closer look at each one below.
Traditional economies are based in tradition. The 3MQ are answered by ancestry, habit, and customs (we do things the way we have always done things).
People in these societies are usually born in a small village and do the same things their parents and grandparents did (hunting, farming, herding cattle, etc.) These societies are primarily rural/agricultural and are based on bartering or subsistence agriculture (producing only enough food for survival; no surplus). There may also be some cottage industry, where goods are produced by hand at home (weaving, carving, etc.) Communal societies like these have little, if any, private property.
Pros: People know their role, the methods work
Cons: Resistant to change/new ideas, low standard of living
Examples include: the Kalahari Bushmen, Berbers of Algeria, Villages of South Asia.
(Free Enterprise, Capitalism)
Market economies involve the exchange of goods and services for a price. People in these societies produce whatever they want, and purchase whatever they want. (Individuals answer the 3MQ). Market economies are based on the principles of laissez faire and supply and demand (see below). Food is produced through commercial agriculture (large scale production of food in surplus) and goods are produced through commercial industry (large scale production of goods in surplus).
Pros: flexible, individual freedom, no government planning, decentralized decision making, high consumer satisfaction, private property rights
Cons: slow to change, allows failure, does not meet everyone's needs
Examples include: The United States, Great Britain, France, Canada, Japan, Germany
----------------------------------------------------------------------------------------------------------Prices for goods are determined by supply and demand:
Sellers (producers) will generally produce a lot of a good at a high price in order to make a profit. Buyers (consumers) will generally buy more of things when they cost less. The quantity and price of a good are determined by where these two desires intersect.
In contrast to a market economy, where production and distribution are based on individual interests, in a command economy, production and distribution of goods are planned by a central governing authority.
Remember that in communism, the government controls all aspects of life in order to provide for everyone's needs. There is no private property or competition for revenue/resources like in a market economy. Instead, in a communist economy, the government determines what is produced, how it is produced, and then distributes those goods evenly to all citizens. (The government answers the 3MQ). The ultimate goal is to create a classless (equal) society.
Pros: allows for quick change, everyone knows their role, basic needs are met
Cons: centralized planning/massive bureaucracy, consumer wants ignored, no incentives to work, inflexibility
Former examples: Soviet Union Modern examples: North Korea, Cuba, Vietnam
Note: Today, China is communist politically, but economically has opened up to the free market.
In the real world, no economy totally follows one economic system. Most countries have mixed economies which blend features of economic systems.
A socialist economy is an example of a mixed economy, as it has some aspects of communism and capitalism. While communist economies run entirely on government planning, socialist economies just have government ownership of major industries and use that control to more equally provide public services. Like capitalism, in a socialist economy, the government allows private ownership of small businesses. (In other words, both individuals and the government answer the 3MQ).
Pros: basic needs are met
Cons: high taxes; limited property rights, economic freedom, and profit motive
Examples include: Israel, Sweden