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By the end of this section, you will be able to:

  • Contrast traditional economies, command economies, and market economies
  • Explain gross domestic product (GDP)
  • Assess the importance and effects of globalization

Think about what a complex system a modern economy is. It includes all production of goods and services, all buying and selling, all employment. The economic life of every individual is interrelated, at least to a small extent, with the economic lives of thousands or even millions of other individuals. Who organizes and coordinates this system? Who insures that, for example, the number of televisions a society provides is the same as the amount it needs and wants? Who insures that the right number of employees work in the electronics industry? Who insures that televisions are produced in the best way possible? How does it all get done?

There are at least three ways societies have found to organize an economy. The first is the traditional economy    , which is the oldest economic system and can be found in parts of Asia, Africa, and South America. Traditional economies organize their economic affairs the way they have always done (i.e., tradition). Occupations stay in the family. Most families are farmers who grow the crops they have always grown using traditional methods. What you produce is what you get to consume. Because things are driven by tradition, there is little economic progress or development.

A command economy

The image is a photograph of people riding camels in front of two pyramids in Egypt.
Ancient Egypt was an example of a command economy. (Credit: Jay Bergesen/Flickr Creative Commons)

Command economies are very different. In a command economy    , economic effort is devoted to goals passed down from a ruler or ruling class. Ancient Egypt was a good example: a large part of economic life was devoted to building pyramids, like those shown in [link] , for the pharaohs. Medieval manor life is another example: the lord provided the land for growing crops and protection in the event of war. In return, vassals provided labor and soldiers to do the lord’s bidding. In the last century, communism emphasized command economies.

In a command economy, the government decides what goods and services will be produced and what prices will be charged for them. The government decides what methods of production will be used and how much workers will be paid. Many necessities like healthcare and education are provided for free. Currently, Cuba and North Korea have command economies.

A market economy

The image is a photograph of the New York Stock Exchange’s entrance
Nothing says “market” more than The New York Stock Exchange. (Credit: Erik Drost/Flickr Creative Commons)

Although command economies have a very centralized structure for economic decisions, market economies have a very decentralized structure. A market    is an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses. The New York Stock Exchange, shown in [link] , is a prime example of market in which buyers and sellers are brought together. In a market economy    , decision-making is decentralized. Market economies are based on private enterprise    : the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals. Businesses supply goods and services based on demand. (In a command economy, by contrast, resources and businesses are owned by the government.) What goods and services are supplied depends on what is demanded. A person’s income is based on his or her ability to convert resources (especially labor) into something that society values. The more society values the person’s output, the higher the income (think Lady Gaga or LeBron James). In this scenario, economic decisions are determined by market forces, not governments.

Questions & Answers

What is Industrialization
Desmond Reply
Industrialization is the concentration of industry in a geographical area
Onome
Industrialization is the process of applying mechanical, chemical, and electrical sciences to reorganize production with inanimate sources of energy
Nwawuba
in the long run what profit does a perfect competitive firm makes
nyoja Reply
what is industrialisation
Blessing Reply
what are their importance
esther Reply
pls who is a consumer
Cobby Reply
whoever use the product can be the consumer either the buyer of it or people at home who will be using the product
Donatius
compensation of goods and services by a customer with price that willing to satisfy themselves.
Kho
who describe economic
yao Reply
thediminishingarginalutility
Stanley Reply
mean
yao
pls I'm a home economic student and went I was in my formal school I was doing biology so wen I got she 2 and I went a different school and that school they don't do biology what they do is economics and I don't understand it cos I didn't learn from form one so I will need ur help in this please
Hawa Reply
what help u need
Fatema
I don't understand it I tried to learn from form one but still don't understand
Hawa
jxt follow the notes well try solving question under it
Nana
important of economics
Benita Reply
what is supply chain
Jos Reply
What is Fiscal policy
Adeola
what is financial management? And why is it necessary in business ?
Fatema Reply
it is the managing of all transactions that take place in any business and if not managed properly it could create debts and destroy the business
Asive
What is demand?
Annonymous Reply
why is degree important in economics
Ebunoluwa Reply
important of enocomic
Adu Reply
what is division of labour
Dennis Reply
division of labour can be defined as the separation of task to individuals in any economic system to specialize on it.
Ahmad
division of labour is the breaking Down of production process into different stages, each stages is handle by an individual
Victoria
what is supply
Adeola Reply
supply refers to the quantity of goods and services that suppliers are willing and able to supply at certain priceces over a period of time.
Philimon
Supply is the total amount of goods and services that the producer is willing to supply in the market.
James

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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