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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

production possibility curve
Mama Reply
graphs about production possibility curve?
what are the concept of economic
dauda Reply
demand suply and population
graphs on about ppc
with the aid of diagrams illustrate movement along and shifts in demand curve
Mercy Reply
what is scarcity
ISAH Reply
limited in supply relative to demand
scarcity means resources available to provide our daily needs are limited
shortage of resources that we need for our demand. basically price go up due to this problem.
scarcity means our resources r not enough for us or our resources r limited
discuss the effects of price controls int the economy
• It stimulates excess demand, which cannot be statified ie shortage in the market. • It encourages hoarding of commodities by wholesales and retailers. • It leads to the creation of " black market" or undercounter sales and its attendant high prices. • It encourage conditional sales of products.
What are the reasons for the existence of monopoly?
Gerry Reply
Because such barriers occur in different forms, there are therefore varying reasons for the existence of monopolies. Ownership of a Key Resource: When one company exerts sole control over a resource that is necessary for the production of a specific product, the market may become a monopoly.
Thanks Kenneth
what is international trade
Syed Reply
what is imperfect compition
what is crowding out effect
what is federal finance?
what is populic
what is imperfect compition
Explain five importance of the study of economic
Francis Reply
study of economics help a person to make rational choice in multiple wants. help individual to be a well all-round thinker.
the five important of the study of economics are as follows (1)time (2)management of resources (3)choice making (4)business(5)scarcity
an increase in demand (while supply remains constant) what will happen to deh graph?
Thabiso Reply
what is going to happen to the graph if there is an increase in demand, While supply remains constant .
What will happen to the graph if there is an increase in demand While supply remains constant?
price will increase high than automatically demand will decrease
equilibrium ?
is when the supply and demand are balanced
what is demand
Sarkwah Reply
demand is the willingness to buy a commodity backed by the ability to pay.
demand is mere desire on commodity with ability to back up with purchasing power
demand is the want of commodity back by the ability to pay for that commodity
demand is the willingness to buy any type of commodity for the exchange of something that is valuable to the seller.
demand is any valuable commodity that people are willing to buy at prices.
Equilibrium is when there's an equality between quantity demanded and quantity supplied
Victory Reply
Again the consumer will be in equilibrium if the price of the commodity is equal to Marginal utility of that product
wat is the law of supply
Agnes Reply
It's what* -The law of supply states that price and supply is relative. As all factors are equal, if price increases then quantity of supply there for increases.
the law of suppy state that when prise is high, more commodity with be supply and when p is low less of the same commodity will be supply.
It states that, "other things being equal, move supplied at a higher price than at a lower price ".
it's state that the increased in prices will lead to decreased in supply
what is the theory of supply and the determinants of demand
And please what is change in quantity supplied?
guys why are you so quiet
A woman has a television set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her television set for $450. What is the opportunity Cost of keeping the old TV?
Murewah Reply
Maybe the opportunity cost of the TV is 800
principle of effective demand?
Abubakar Reply

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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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